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A spring-block analogy for the dynamics of stock indexes

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  • Bulcsu Sandor
  • Zoltan Neda

Abstract

A spring-block chain placed on a running conveyor belt is considered for modeling stylized facts observed in the dynamics of stock indexes. Individual stocks are modeled by the blocks, while the stock-stock correlations are introduced via simple elastic forces acting in the springs. The dragging effect of the moving belt corresponds to the expected economic growth. The spring-block system produces collective behavior and avalanche like phenomena, similar to the ones observed in stock markets. An artificial index is defined for the spring-block chain, and its dynamics is compared with the one measured for the Dow Jones Industrial Average. For certain parameter regions the model reproduces qualitatively well the dynamics of the logarithmic index, the logarithmic returns, the distribution of the logarithmic returns, the avalanche-size distribution and the distribution of the investment horizons. A noticeable success of the model is that it is able to account for the gain-loss asymmetry observed in the inverse statistics. Our approach has mainly a pedagogical value, bridging between a complex socio-economic phenomena and a basic (mechanical) model in physics.

Suggested Citation

  • Bulcsu Sandor & Zoltan Neda, 2014. "A spring-block analogy for the dynamics of stock indexes," Papers 1409.1748, arXiv.org.
    • Handle: RePEc:arx:papers:1409.1748
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    References listed on IDEAS

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    1. Iwaisako, Tokuo & 祝迫, 得夫, 2007. "Stock Index Autocorrelation and Cross-autocorrelations of Size-sorted Portfolios in the Japanese Market," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 48(1), pages 95-112, June.
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