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Spin models as microfoundation of macroscopic financial market models

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  • Sebastian M. Krause
  • Stefan Bornholdt

Abstract

Macroscopic price evolution models are commonly used for investment strategies. There are first promising achievements in defining microscopic agent based models for the same purpose. Microscopic models allow a deeper understanding of mechanisms in the market than the purely phenomenological macroscopic models, and thus bear the chance for better models for market regulation. We exemplify this strategy in a case study, deducing a macroscopic Langevin equation from a microscopic spin market model closely related to the Ising model. The interplay of the microscopic and the macroscopic view allows for a better understanding of the microscopic model, as well, and may guide the construction of agent based market models as basis of macroscopic price models.

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  • Sebastian M. Krause & Stefan Bornholdt, 2011. "Spin models as microfoundation of macroscopic financial market models," Papers 1103.5345, arXiv.org.
  • Handle: RePEc:arx:papers:1103.5345
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    References listed on IDEAS

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    1. Coelho, Ricardo & Gilmore, Claire G. & Lucey, Brian & Richmond, Peter & Hutzler, Stefan, 2007. "The evolution of interdependence in world equity markets—Evidence from minimum spanning trees," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 376(C), pages 455-466.
    2. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    3. Annalisa Fabretti & Marcel Ausloos, 2005. "Recurrence analysis of the NASDAQ crash of April 2000," Papers physics/0505170, arXiv.org.
    4. Bastos, João A. & Caiado, Jorge, 2011. "Recurrence quantification analysis of global stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, pages 1315-1325.
    5. Marc Potters & Jean-Philippe Bouchaud, 2001. "More stylized facts of financial markets: leverage effect and downside correlations," Science & Finance (CFM) working paper archive 29960, Science & Finance, Capital Fund Management.
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    Cited by:

    1. Tetsuya Takaishi, 2014. "Analysis of Spin Financial Market by GARCH Model," Papers 1409.0118, arXiv.org.
    2. repec:wsi:acsxxx:v:18:y:2015:i:03n04:n:s0219525915500113 is not listed on IDEAS

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