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An Ising spin state explanation for financial asset allocation

Author

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  • Horvath, Philip A.
  • Roos, Kelly R.
  • Sinha, Amit

Abstract

We build on the developments in the application of statistical mechanics, notably the identity of the spin degree of freedom in the Ising model, to explain asset price dynamics in financial markets with a representative agent. Specifically, we consider the value of an individual spin to represent the proportional holdings in various assets. We use partial moment arguments to identify asymmetric reactions to information and develop an extension of a plunging and dumping model. This unique identification of the spin is a relaxation of the conventional discrete state limitation on an Ising spin to accommodate a new archetype in Ising model-finance applications wherein spin states may take on continuous values, and may evolve in time continuously, or discretely, depending on the values of the partial moments.

Suggested Citation

  • Horvath, Philip A. & Roos, Kelly R. & Sinha, Amit, 2016. "An Ising spin state explanation for financial asset allocation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 445(C), pages 112-116.
  • Handle: RePEc:eee:phsmap:v:445:y:2016:i:c:p:112-116
    DOI: 10.1016/j.physa.2015.10.064
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    References listed on IDEAS

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