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Shocks in financial markets, price expectation, and damped harmonic oscillators

  • Leonidas Sandoval Junior
  • Italo De Paula Franca
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    Using a modified damped harmonic oscillator model equivalent to a model of market dynamics with price expectations, we analyze the reaction of financial markets to shocks. In order to do this, we gather data from indices of a variety of financial markets for the 1987 Black Monday, the Russian crisis of 1998, the crash after September 11th (2001), and the recent downturn of markets due to the subprime mortgage crisis in the USA (2008). Analyzing those data we were able to establish the amount by which each market felt the shocks, a dampening factor which expresses the capacity of a market of absorving a shock, and also a frequency related with volatility after the shock. The results gauge the efficiency of different markets in recovering from such shocks, and measure some level of dependence between them. We also show, using the correlation matrices between the indices used, that financial markets are now much more connected than they were two decades ago.

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    File URL: http://arxiv.org/pdf/1103.1992
    File Function: Latest version
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    Paper provided by arXiv.org in its series Papers with number 1103.1992.

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    Date of creation: Mar 2011
    Date of revision: Sep 2011
    Handle: RePEc:arx:papers:1103.1992
    Contact details of provider: Web page: http://arxiv.org/

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    1. Philipp Hartmann & Stefan Straetmans & Casper G. de Vries, 2001. "Asset market linkages in crisis periods," Proceedings 727, Federal Reserve Bank of Chicago.
    2. Cars Hommes & Thomas Lux, 2008. "Individual Expectations and Aggregate Behavior in Learning to Forecast Experiments," Kiel Working Papers 1466, Kiel Institute for the World Economy.
    3. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2002. "Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion," CEPR Discussion Papers 3310, C.E.P.R. Discussion Papers.
    4. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
    5. Pierre Cizeau & Marc Potters & Jean-Philippe Bouchaud, 2000. "Correlation structure of extreme stock returns," Science & Finance (CFM) working paper archive 0006034, Science & Finance, Capital Fund Management.
    6. Bartram, Sohnke M. & Wang, Yaw-Huei, 2005. "Another look at the relationship between cross-market correlation and volatility," Finance Research Letters, Elsevier, vol. 2(2), pages 75-88, June.
    7. Y. Malevergne & D. Sornette, 2002. "Investigating Extreme Dependences: Concepts and Tools," Papers cond-mat/0203166, arXiv.org.
    8. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-33, July.
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