IDEAS home Printed from https://ideas.repec.org/p/arx/papers/0908.0682.html
   My bibliography  Save this paper

Global risk minimization in financial markets

Author

Listed:
  • Andreas Martin Lisewski

Abstract

Recurring international financial crises have adverse socioeconomic effects and demand novel regulatory instruments or strategies for risk management and market stabilization. However, the complex web of market interactions often impedes rational decisions that would absolutely minimize the risk. Here we show that, for any given expected return, investors can overcome this complexity and globally minimize their financial risk in portfolio selection models, which is mathematically equivalent to computing the ground state of spin glass models in physics, provided the margin requirement remains below a critical, empirically measurable value. For markets with centrally regulated margin requirements, this result suggests a potentially stabilizing intervention strategy.

Suggested Citation

  • Andreas Martin Lisewski, 2009. "Global risk minimization in financial markets," Papers 0908.0682, arXiv.org.
    • Handle: RePEc:arx:papers:0908.0682
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/0908.0682
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Galluccio, Stefano & Bouchaud, Jean-Philippe & Potters, Marc, 1998. "Rational decisions, random matrices and spin glasses," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 259(3), pages 449-456.
    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. Pafka, Szilárd & Kondor, Imre, 2001. "Evaluating the RiskMetrics methodology in measuring volatility and Value-at-Risk in financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 305-310.
    2. Diane Wilcox & Tim Gebbie, 2004. "Serial Correlation, Periodicity and Scaling of Eigenmodes in an Emerging Market," Papers cond-mat/0404416, arXiv.org, revised Sep 2007.
    3. N. C. Suganya & G. A. Vijayalakshmi Pai, 2010. "Pareto‐archived evolutionary wavelet network for financial constrained portfolio optimization," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 17(2), pages 59-90, April.
    4. Raddant, Matthias & Wagner, Friedrich, 2013. "Phase transition in the S&P stock market," Kiel Working Papers 1846, Kiel Institute for the World Economy (IfW Kiel).
    5. Jerome Garnier-Brun & Michael Benzaquen & Stefano Ciliberti & Jean-Philippe Bouchaud, 2021. "A new spin on optimal portfolios and ecological equilibria," Papers 2104.00668, arXiv.org, revised Oct 2021.
    6. Gloria Polinesi & Maria Cristina Recchioni, 2021. "Filtered clustering for exchange traded fund," RIEDS - Rivista Italiana di Economia, Demografia e Statistica - The Italian Journal of Economic, Demographic and Statistical Studies, SIEDS Societa' Italiana di Economia Demografia e Statistica, vol. 75(1), pages 125-135, January-M.
    7. Diane Wilcox & Tim Gebbie, 2004. "An analysis of Cross-correlations in South African Market data," Papers cond-mat/0402389, arXiv.org, revised Sep 2006.
    8. Gao, Yan & Gao, Yao, 2015. "Statistical properties of short-selling and margin-trading activities and their impacts on returns in the Chinese stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 438(C), pages 293-307.
    9. Wilcox, Diane & Gebbie, Tim, 2004. "On the analysis of cross-correlations in South African market data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 344(1), pages 294-298.
    10. Lux, Thomas, 2008. "Applications of statistical physics in finance and economics," Kiel Working Papers 1425, Kiel Institute for the World Economy (IfW Kiel).
    11. Lisewski, Andreas Martin & Lichtarge, Olivier, 2010. "Untangling complex networks: Risk minimization in financial markets through accessible spin glass ground states," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(16), pages 3250-3253.
    12. M. Andrecut, 2013. "Spin Glasses and Nonlinear Constraints in Portfolio Optimization," Papers 1311.2511, arXiv.org.
    13. Imre Kondor & István Csabai & Gábor Papp & Enys Mones & Gábor Czimbalmos & Máté Sándor, 2014. "Strong random correlations in networks of heterogeneous agents," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 9(2), pages 203-232, October.
    14. Gili Rosenberg & Poya Haghnegahdar & Phil Goddard & Peter Carr & Kesheng Wu & Marcos L'opez de Prado, 2015. "Solving the Optimal Trading Trajectory Problem Using a Quantum Annealer," Papers 1508.06182, arXiv.org, revised Aug 2016.
    15. Binner, J.M. & Tino, P. & Tepper, J. & Anderson, R. & Jones, B. & Kendall, G., 2010. "Does money matter in inflation forecasting?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4793-4808.
    16. Lara Dalmeyer & Tim Gebbie, 2021. "Geometric insights into robust portfolio construction," Papers 2107.06194, arXiv.org, revised Jul 2024.
    17. Troy Tassier, 2013. "Handbook of Research on Complexity, by J. Barkley Rosser, Jr. and Edward Elgar," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 39(1), pages 132-133.
    18. Thomas Bouquet & Mehdi Hmyene & Franc{c}ois Porcher & Lorenzo Pugliese & Jad Zeroual, 2021. "Approximating Optimal Asset Allocations using Simulated Bifurcation," Papers 2108.03092, arXiv.org, revised Dec 2021.
    19. Jerome Garnier-Brun & Michael Benzaquen & Stefano Ciliberti & Jean-Philippe Bouchaud, 2021. "A new spin on optimal portfolios and ecological equilibria," Post-Print hal-03378915, HAL.
    20. Giacomo Livan & Jun-ichi Inoue & Enrico Scalas, 2012. "On the non-stationarity of financial time series: impact on optimal portfolio selection," Papers 1205.0877, arXiv.org, revised Jul 2012.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:arx:papers:0908.0682. 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: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    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.