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Shocks in financial markets, price expectation, and damped harmonic oscillators

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  • Leonidas Sandoval Junior
  • Italo De Paula Franca
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    Abstract

    Using a modified damped harmonic oscillator model equivalent to a model of market dynamics with price expectations, we analyze the reaction of financial markets to shocks. In order to do this, we gather data from indices of a variety of financial markets for the 1987 Black Monday, the Russian crisis of 1998, the crash after September 11th (2001), and the recent downturn of markets due to the subprime mortgage crisis in the USA (2008). Analyzing those data we were able to establish the amount by which each market felt the shocks, a dampening factor which expresses the capacity of a market of absorving a shock, and also a frequency related with volatility after the shock. The results gauge the efficiency of different markets in recovering from such shocks, and measure some level of dependence between them. We also show, using the correlation matrices between the indices used, that financial markets are now much more connected than they were two decades ago.

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    File URL: http://arxiv.org/pdf/1103.1992
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1103.1992.

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    Date of creation: Mar 2011
    Date of revision: Sep 2011
    Handle: RePEc:arx:papers:1103.1992

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    1. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, Econometric Society, vol. 62(4), pages 901-33, July.
    2. P. Hartmann & S. Straetmans & C.G. de Vries, 2001. "Asset Market Linkages in Crisis Periods," Tinbergen Institute Discussion Papers 01-071/2, Tinbergen Institute.
    3. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2002. "Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3310, C.E.P.R. Discussion Papers.
    4. Pierre Cizeau & Marc Potters & Jean-Philippe Bouchaud, 2000. "Correlation structure of extreme stock returns," Papers cond-mat/0006034, arXiv.org, revised Jan 2001.
    5. Y. Malevergne & D. Sornette, 2002. "Investigating Extreme Dependences: Concepts and Tools," Papers cond-mat/0203166, arXiv.org.
    6. Bartram, Sohnke M. & Wang, Yaw-Huei, 2005. "Another look at the relationship between cross-market correlation and volatility," Finance Research Letters, Elsevier, Elsevier, vol. 2(2), pages 75-88, June.
    7. Hommes, Cars & Lux, Thomas, 2013. "Individual Expectations And Aggregate Behavior In Learning-To-Forecast Experiments," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 17(02), pages 373-401, March.
    8. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc.
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