IDEAS home Printed from https://ideas.repec.org/a/eee/chsofr/v134y2020ics0960077920300849.html
   My bibliography  Save this article

Fluctuations-induced regime shifts in the Endogenous Credit system with time delay

Author

Listed:
  • Wu, Anshun
  • Dong, Yang
  • Luo, Yuhui
  • Zeng, Chunhua

Abstract

The model of endogenous credit that exhibits multiple steady states and generates phase transitions with catastrophic abruptness has been investigated. This resembles aspects of financial meltdowns witnessed in global capital markets in 2007. In this paper, time delay and fluctuations (noises) are introduced into the endogenous credit model, and a stochastic asset price dynamics model with time delay is established. The effects of time delay, fluctuations and cross-correlation between two noises on the probability distribution and the mean first passage time (MFPT) are analyzed, and the theoretical results are in agreement with the numerical results. It is shown from time series and probability distribution that the noises and time delay can induce regime shifts between two stable states. For the positive cross-correlation between two noises (λ > 0.0), the MFPT exhibits a maximum for some characteristic values of the noise intensity, which identifies the signature of the noise-enhanced stability (NES) phenomenon for asset price. The cross-correlation between two noises enhances the NES phenomenon for asset price, while time delay weakens it. However for the zero and negative intensity of noise correlation (λ ≤ 0.0), the MFPT decreases as the noise intensity increases, namely, the NES phenomenon disappears for λ ≤ 0.0.

Suggested Citation

  • Wu, Anshun & Dong, Yang & Luo, Yuhui & Zeng, Chunhua, 2020. "Fluctuations-induced regime shifts in the Endogenous Credit system with time delay," Chaos, Solitons & Fractals, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:chsofr:v:134:y:2020:i:c:s0960077920300849
    DOI: 10.1016/j.chaos.2020.109682
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0960077920300849
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.chaos.2020.109682?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Brogaard, Jonathan & Li, Dan & Xia, Ying, 2017. "Stock liquidity and default risk," Journal of Financial Economics, Elsevier, vol. 124(3), pages 486-502.
    3. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    4. Valenti, Davide & Spagnolo, Bernardo & Bonanno, Giovanni, 2007. "Hitting time distributions in financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 311-320.
    5. Zhang, Chun & Zeng, Jiakui & Tian, Dong & Luo, Hongchun & Yang, Tao & Han, Qinglin & Xiang, Chao & Zeng, Chunhua & Wang, Canjun, 2015. "Delays-based protein switches in a stochastic single-gene network," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 434(C), pages 68-83.
    6. G. Bonanno & D. Valenti & B. Spagnolo, 2005. "Role of Noise in a Market Model with Stochastic Volatility," Papers cond-mat/0510154, arXiv.org, revised Oct 2006.
    7. Jaume Masoliver & Josep Perello, 2008. "The escape problem under stochastic volatility: the Heston model," Papers 0807.1014, arXiv.org.
    8. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    9. Han, Qinglin & Yang, Tao & Zeng, Chunhua & Wang, Hua & Liu, Zhiqiang & Fu, Yunchang & Zhang, Chun & Tian, Dong, 2014. "Impact of time delays on stochastic resonance in an ecological system describing vegetation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 408(C), pages 96-105.
    10. David G. Hobson & L. C. G. Rogers, 1998. "Complete Models with Stochastic Volatility," Mathematical Finance, Wiley Blackwell, vol. 8(1), pages 27-48, January.
    11. Acharya, Viral & Naqvi, Hassan, 2012. "The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle," Journal of Financial Economics, Elsevier, vol. 106(2), pages 349-366.
    12. Valenti, D. & Tranchina, L. & Brai, M. & Caruso, A. & Cosentino, C. & Spagnolo, B., 2008. "Environmental metal pollution considered as noise: Effects on the spatial distribution of benthic foraminifera in two coastal marine areas of Sicily (Southern Italy)," Ecological Modelling, Elsevier, vol. 213(3), pages 449-462.
    13. Li, Jiang-Cheng & Long, Chao & Chen, Xiao-Dan, 2015. "The returns and risks of investment portfolio in stock market crashes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 427(C), pages 282-288.
    14. Chordia, Tarun & Subrahmanyam, Avanidhar & Anshuman, V. Ravi, 2001. "Trading activity and expected stock returns," Journal of Financial Economics, Elsevier, vol. 59(1), pages 3-32, January.
    15. Jaume Masoliver & Josep Perello, 2009. "First-passage and risk evaluation under stochastic volatility," Papers 0902.2735, arXiv.org.
    16. Vishwesha Guttal & Srinivas Raghavendra & Nikunj Goel & Quentin Hoarau, 2016. "Lack of Critical Slowing Down Suggests that Financial Meltdowns Are Not Critical Transitions, yet Rising Variability Could Signal Systemic Risk," PLOS ONE, Public Library of Science, vol. 11(1), pages 1-20, January.
    17. Zhang, Chun & Du, Liping & Wang, Tonghuan & Yang, Tao & Zeng, Chunhua & Wang, Canjun, 2017. "Impact of time delay in a stochastic gene regulation network," Chaos, Solitons & Fractals, Elsevier, vol. 96(C), pages 120-129.
    18. Bernardo Spagnolo & Davide Valenti, 2008. "Volatility Effects on the Escape Time in Financial Market Models," Papers 0810.1625, arXiv.org.
    19. La Barbera, A & Spagnolo, B, 2002. "Spatio-temporal patterns in population dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 314(1), pages 120-124.
    20. Jean-Philippe Bouchaud & Rama Cont, 1998. "A Langevin approach to stock market fluctuations and crashes," Science & Finance (CFM) working paper archive 500027, Science & Finance, Capital Fund Management.
    21. G. Bonanno & D. Valenti & B. Spagnolo, 2006. "Role of noise in a market model with stochastic volatility," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 53(3), pages 405-409, October.
    22. Kazmerchuk, Yuriy & Swishchuk, Anatoliy & Wu, Jianhong, 2007. "The pricing of options for securities markets with delayed response," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 75(3), pages 69-79.
    23. Zeeman, E. C., 1974. "On the unstable behaviour of stock exchanges," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 39-49, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dong, Yang & Wen, Shu-hui & Hu, Xiao-bing & Li, Jiang-Cheng, 2020. "Stochastic resonance of drawdown risk in energy market prices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 540(C).
    2. Zhong, Guang-Yan & He, Feng & Li, Jiang-Cheng & Mei, Dong-Cheng & Tang, Nian-Sheng, 2019. "Coherence resonance-like and efficiency of financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 534(C).
    3. Zhong, Guang-Yan & Li, Jiang-Cheng & Jiang, George J. & Li, Hai-Feng & Tao, Hui-Ming, 2018. "The time delay restraining the herd behavior with Bayesian approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 507(C), pages 335-346.
    4. Ko, Bonggyun & Song, Jae Wook, 2018. "A simple analytics framework for evaluating mean escape time in different term structures with stochastic volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 505(C), pages 398-412.
    5. Zhou, Wei & Zhong, Guang-Yan & Li, Jiang-Cheng, 2022. "Stability of financial market driven by information delay and liquidity in delay agent-based model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 600(C).
    6. Xing, Dun-Zhong & Li, Hai-Feng & Li, Jiang-Cheng & Long, Chao, 2021. "Forecasting price of financial market crash via a new nonlinear potential GARCH model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 566(C).
    7. Koo, Eunho & Kim, Geonwoo, 2017. "Explicit formula for the valuation of catastrophe put option with exponential jump and default risk," Chaos, Solitons & Fractals, Elsevier, vol. 101(C), pages 1-7.
    8. Li, Jiang-Cheng & Tao, Chen & Li, Hai-Feng, 2022. "Dynamic forecasting performance and liquidity evaluation of financial market by Econophysics and Bayesian methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 588(C).
    9. Gong, Xiao-li & Zhuang, Xin-tian, 2016. "Option pricing and hedging for optimized Lévy driven stochastic volatility models," Chaos, Solitons & Fractals, Elsevier, vol. 91(C), pages 118-127.
    10. Wang, Weiwei & Ralescu, Dan A., 2021. "Valuation of lookback option under uncertain volatility model," Chaos, Solitons & Fractals, Elsevier, vol. 153(P1).
    11. Li, Jiang-Cheng & Xu, Ming-Zhe & Han, Xu & Tao, Chen, 2022. "Dynamic risk resonance between crude oil and stock market by econophysics and machine learning," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 607(C).
    12. Zhang, Qingye & Gao, Yan, 2016. "Optimal consumption—portfolio problem with CVaR constraints," Chaos, Solitons & Fractals, Elsevier, vol. 91(C), pages 516-521.
    13. Batra, Luckshay & Taneja, H.C., 2021. "Approximate-Analytical solution to the information measure’s based quanto option pricing model," Chaos, Solitons & Fractals, Elsevier, vol. 153(P1).
    14. Leng, Na & Li, Jiang-Cheng, 2020. "Forecasting the crude oil prices based on Econophysics and Bayesian approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 554(C).
    15. Ping, Zhu, 2023. "Analytical equivalent transformation method for nonlinear stochastic dynamics with multiple noises in high dimensions," Chaos, Solitons & Fractals, Elsevier, vol. 176(C).
    16. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    17. Gniadkowska-Szymańska Agata, 2017. "The impact of trading liquidity on the rate of return on emerging markets: the example of Poland and the Baltic countries," Financial Internet Quarterly (formerly e-Finanse), Sciendo, vol. 13(4), pages 136-148, December.
    18. Farzami, Yasmine & Gregory-Allen, Russell & Molchanov, Alexander & Sehrish, Saba, 2021. "COVID-19 and the liquidity network," Finance Research Letters, Elsevier, vol. 42(C).
    19. Jeong, Giho & Kang, Jangkoo & Kwon, Kyung Yoon, 2018. "Liquidity skewness premium," The North American Journal of Economics and Finance, Elsevier, vol. 46(C), pages 130-150.
    20. Vu, Van & Chai, Daniel & Do, Viet, 2015. "Empirical tests on the liquidity-adjusted capital asset pricing model," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 73-89.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:chsofr:v:134:y:2020:i:c:s0960077920300849. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thayer, Thomas R. (email available below). General contact details of provider: https://www.journals.elsevier.com/chaos-solitons-and-fractals .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.