Global risk minimization in financial markets
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.
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- Stefano Galluccio & Jean-Philippe Bouchaud & Marc Potters, 1998.
"Rational decisions, random matrices and spin glasses,"
Science & Finance (CFM) working paper archive
500054, Science & Finance, Capital Fund Management.
- Stefano Galluccio & Jean-Philippe Bouchaud & Marc Potters, 1998. "Rational Decisions, Random Matrices and Spin Glasses," Papers cond-mat/9801209, arXiv.org.
- 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.
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