IDEAS home Printed from https://ideas.repec.org/a/plo/pone00/0019378.html
   My bibliography  Save this article

Index Cohesive Force Analysis Reveals That the US Market Became Prone to Systemic Collapses Since 2002

Author

Listed:
  • Dror Y Kenett
  • Yoash Shapira
  • Asaf Madi
  • Sharron Bransburg-Zabary
  • Gitit Gur-Gershgoren
  • Eshel Ben-Jacob

Abstract

Background: The 2007–2009 financial crisis, and its fallout, has strongly emphasized the need to define new ways and measures to study and assess the stock market dynamics. Methodology/Principal Findings: The S&P500 dynamics during 4/1999–4/2010 is investigated in terms of the index cohesive force (ICF - the balance between the stock correlations and the partial correlations after subtraction of the index contribution), and the Eigenvalue entropy of the stock correlation matrices. We found a rapid market transition at the end of 2001 from a flexible state of low ICF into a stiff (nonflexible) state of high ICF that is prone to market systemic collapses. The stiff state is also marked by strong effect of the market index on the stock-stock correlations as well as bursts of high stock correlations reminiscence of epileptic brain activity. Conclusions/Significance: The market dynamical states, stability and transition between economic states was studies using new quantitative measures. Doing so shed new light on the origin and nature of the current crisis. The new approach is likely to be applicable to other classes of complex systems from gene networks to the human brain.

Suggested Citation

  • Dror Y Kenett & Yoash Shapira & Asaf Madi & Sharron Bransburg-Zabary & Gitit Gur-Gershgoren & Eshel Ben-Jacob, 2011. "Index Cohesive Force Analysis Reveals That the US Market Became Prone to Systemic Collapses Since 2002," PLOS ONE, Public Library of Science, vol. 6(4), pages 1-8, April.
    • Handle: RePEc:plo:pone00:0019378
    DOI: 10.1371/journal.pone.0019378
    as

    Download full text from publisher

    File URL: https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0019378
    Download Restriction: no
    File URL: https://journals.plos.org/plosone/article/file?id=10.1371/journal.pone.0019378&type=printable
    Download Restriction: no
    File URL: https://libkey.io/10.1371/journal.pone.0019378?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
    ---><---

    References listed on IDEAS

    as
    1. Malevergne, Y. & Sornette, D., 2007. "Self-consistent asset pricing models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 149-171.
    2. Y. Shapira & D. Y. Kenett & E. Ben-Jacob, 2009. "The Index cohesive effect on stock market correlations," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 72(4), pages 657-669, December.
    3. Didier Sornette & Ryan Woodard & Maxim Fedorovsky & Stefan Reimann & Hilary Woodard & Wei-Xing Zhou, 2010. "The Financial Bubble Experiment: Advanced Diagnostics and Forecasts of Bubble Terminations Volume II-Master Document," Papers 1005.5675, arXiv.org, revised Nov 2010.
    4. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
    5. Dror Y. Kenett & Yoash Shapira & Eshel Ben-Jacob, 2009. "RMT Assessments of the Market Latent Information Embedded in the Stocks' Raw, Normalized, and Partial Correlations," Journal of Probability and Statistics, Hindawi, vol. 2009, pages 1-13, March.
    6. K. Bastiaensen & P. Cauwels & D. Sornette & R. Woodard & W. -X. Zhou, 2009. "The Chinese Equity Bubble: Ready to Burst," Papers 0907.1827, arXiv.org.
    7. Pawel SIECZKA & Didier SORNETTE & Janusz A. HOLYST, 2010. "The Lehman Brothers Effect and Bankruptcy Cascades," Swiss Finance Institute Research Paper Series 10-06, Swiss Finance Institute.
    8. Krawiecki, A. & Hołyst, J.A., 2003. "Stochastic resonance as a model for financial market crashes and bubbles," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 317(3), pages 597-608.
    9. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
    10. Lillo, Fabrizio & Mantegna, Rosario N, 2004. "Dynamics of a financial market index after a crash," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 338(1), pages 125-134.
    11. Jiang, Zhi-Qiang & Zhou, Wei-Xing & Sornette, Didier & Woodard, Ryan & Bastiaensen, Ken & Cauwels, Peter, 2010. "Bubble diagnosis and prediction of the 2005-2007 and 2008-2009 Chinese stock market bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 149-162, June.
    12. D. Sornette & R. Woodard, "undated". "Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis," Working Papers CCSS-09-003, ETH Zurich, Chair of Systems Design.
    13. Onnela, J.-P. & Chakraborti, A. & Kaski, K. & Kertész, J., 2003. "Dynamic asset trees and Black Monday," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 247-252.
    14. Dion Harmon & Marcus A. M. de Aguiar & David D. Chinellato & Dan Braha & Irving R. Epstein & Yaneer Bar-Yam, 2011. "Predicting economic market crises using measures of collective panic," Papers 1102.2620, arXiv.org.
    15. Dror Y. Kenett & Yoash Shapira & Asaf Madi & Sharron Bransburg-Zabary & Gitit Gur-Gershgoren & Eshel Ben-Jacob, 2010. "Dynamics of Stock Market Correlations," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 4(3), pages 330-340, November.
    16. Yannick Malevergne & Pedro Santa-Clara & Didier Sornette, 2009. "Professor Zipf goes to Wall Street," NBER Working Papers 15295, National Bureau of Economic Research, Inc.
    17. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    18. Didier Sornette & Ryan Woodard & Maxim Fedorovsky & Stefan Reimann & Hilary Woodard & Wei-Xing Zhou, 2009. "The Financial Bubble Experiment: advanced diagnostics and forecasts of bubble terminations," Papers 0911.0454, arXiv.org, revised May 2010.
    19. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-896, July.
    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. Yan, Wanfeng & Woodard, Ryan & Sornette, Didier, 2012. "Leverage bubble," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(1), pages 180-186.
      • Wanfeng Yan & Ryan Woodard & Didier Sornette, 2010. "Leverage Bubble," Papers 1011.0458, arXiv.org, revised Nov 2010.
    2. Jovanovic, Franck & Schinckus, Christophe, 2017. "Econophysics and Financial Economics: An Emerging Dialogue," OUP Catalogue, Oxford University Press, number 9780190205034.
    3. Jerome L Kreuser & Didier Sornette, 2017. "Super-Exponential RE Bubble Model with Efficient Crashes," Swiss Finance Institute Research Paper Series 17-33, Swiss Finance Institute.
    4. M. Raddant & T. Di Matteo, 2023. "A look at financial dependencies by means of econophysics and financial economics," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(4), pages 701-734, October.
    5. Wanfeng Yan & Ryan Woodard & Didier Sornette, 2010. "Diagnosis and Prediction of Market Rebounds in Financial Markets," Papers 1003.5926, arXiv.org, revised Mar 2011.
    6. Dror Y Kenett & Matthias Raddant & Thomas Lux & Eshel Ben-Jacob, 2012. "Evolvement of Uniformity and Volatility in the Stressed Global Financial Village," PLOS ONE, Public Library of Science, vol. 7(2), pages 1-8, February.
    7. Kaizoji, Taisei & Leiss, Matthias & Saichev, Alexander & Sornette, Didier, 2015. "Super-exponential endogenous bubbles in an equilibrium model of fundamentalist and chartist traders," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 289-310.
    8. Gautier Marti & Frank Nielsen & Miko{l}aj Bi'nkowski & Philippe Donnat, 2017. "A review of two decades of correlations, hierarchies, networks and clustering in financial markets," Papers 1703.00485, arXiv.org, revised Nov 2020.
    9. Mesly, Olivier & Chkir, Imed & Racicot, François-Éric, 2019. "Predatory cells and puzzling financial crises: Are toxic products good for the financial markets?," Economic Modelling, Elsevier, vol. 78(C), pages 11-31.
    10. Sandoval, Leonidas, 2012. "Pruning a minimum spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(8), pages 2678-2711.
    11. D'Arcangelis, Anna Maria & Rotundo, Giulia, 2021. "Herding in mutual funds: A complex network approach," Journal of Business Research, Elsevier, vol. 129(C), pages 679-686.
    12. Kuang-Liang Chang & Nan-Kuang Chen & Charles Ka Yui Leung, 2013. "In the Shadow of the U nited S tates: The International Transmission Effect of Asset Returns," Pacific Economic Review, Wiley Blackwell, vol. 18(1), pages 1-40, February.
    13. David Vidal-Tomás & Simone Alfarano, 2020. "An agent-based early warning indicator for financial market instability," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(1), pages 49-87, January.
    14. He, Xue-Zhong & Li, Youwei, 2015. "Testing of a market fraction model and power-law behaviour in the DAX 30," Journal of Empirical Finance, Elsevier, vol. 31(C), pages 1-17.
    15. Leonidas Sandoval Junior, 2011. "Cluster formation and evolution in networks of financial market indices," Papers 1111.5069, arXiv.org.
    16. Vishwas Kukreti & Hirdesh K. Pharasi & Priya Gupta & Sunil Kumar, 2020. "A perspective on correlation-based financial networks and entropy measures," Papers 2004.09448, arXiv.org.
    17. Bertaut, Carol & DeMarco, Laurie Pounder & Kamin, Steven & Tryon, Ralph, 2012. "ABS inflows to the United States and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 219-234.
    18. Li Lin & Didier Sornette, 2015. ""Speculative Influence Network" during financial bubbles: application to Chinese Stock Markets," Papers 1510.08162, arXiv.org.
    19. Guillaume Coqueret, 2016. "Empirical properties of a heterogeneous agent model in large dimensions," Post-Print hal-02088097, HAL.
    20. Li, Bao-Gen & Ling, Dian-Yi & Yu, Zu-Guo, 2021. "Multifractal temporally weighted detrended partial cross-correlation analysis of two non-stationary time series affected by common external factors," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 573(C).

    More about this item

    Statistics

    Access and download statistics

    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:plo:pone00:0019378. 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: plosone (email available below). General contact details of provider: https://journals.plos.org/plosone/ .

    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.