Dynamic instability in a phenomenological model of correlated assets
Raffaelli, G. (Giacomo) and Marsili, Matteo, 1966- (2006) Dynamic instability in a phenomenological model of correlated assets. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. (Working papers (Warwick Business School. Financial Econometrics Research Centre)).
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We show that financial correlations exhibit a non-trivial dynamic behavior. We introduce a simple phenomenological model of a multi-asset financial market, which takes into account the impact of portfolio investment on price dynamics. This captures the fact that correlations determine the optimal portfolio but are affected by investment based on it. We show that such a feedback on correlations gives rise to an instability when the volume of investment exceeds a critical value. Close to the critical point the model exhibits dynamical correlations very similar to those observed in real markets. Maximum likelihood estimates of the model’s parameter for empirical data indeed confirm this conclusion, thus suggesting that real markets operate close to a dynamically unstable point.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School
|Library of Congress Subject Headings (LCSH):||Phenomenalism, Capitalism, Portfolio management, Assets (Accounting)|
|Series Name:||Working papers (Warwick Business School. Financial Econometrics Research Centre)|
|Publisher:||Warwick Business School, Financial Econometrics Research Centre|
|Place of Publication:||Coventry|
|Date:||21 April 2006|
|Number of Pages:||11|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
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