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Correlations, Risk and Crisis: From Physiology to Finance

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  • A. N. Gorban
  • E. V. Smirnova
  • T. A. Tyukina

Abstract

We study the dynamics of correlation and variance in systems under the load of environmental factors. A universal effect in ensembles of similar systems under the load of similar factors is described: in crisis, typically, even before obvious symptoms of crisis appear, correlation increases, and, at the same time, variance (and volatility) increases too. This effect is supported by many experiments and observations of groups of humans, mice, trees, grassy plants, and on financial time series. A general approach to the explanation of the effect through dynamics of individual adaptation of similar non-interactive individuals to a similar system of external factors is developed. Qualitatively, this approach follows Selye's idea about adaptation energy.

Suggested Citation

  • A. N. Gorban & E. V. Smirnova & T. A. Tyukina, 2009. "Correlations, Risk and Crisis: From Physiology to Finance," Papers 0905.0129, arXiv.org, revised Aug 2010.
  • Handle: RePEc:arx:papers:0905.0129
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    File URL: http://arxiv.org/pdf/0905.0129
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    References listed on IDEAS

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    1. George Chang & James Feigenbaum, 2006. "A Bayesian analysis of log-periodic precursors to financial crashes," Quantitative Finance, Taylor & Francis Journals, vol. 6(1), pages 15-36.
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    Cited by:

    1. repec:eee:phsmap:v:489:y:2018:i:c:p:102-111 is not listed on IDEAS
    2. Ranjeeni, Kumari, 2014. "Sectoral and industrial performance during a stock market crisis," Economic Systems, Elsevier, vol. 38(2), pages 178-193.
    3. Damasco, Achille & Giuliani, Alessandro, 2017. "A resonance based model of biological evolution," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 471(C), pages 750-756.
    4. repec:eee:phsmap:v:486:y:2017:i:c:p:218-241 is not listed on IDEAS

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