Seminars & Groups

Statistical Signatures in Times of Panic: Markets as a Self-Organizing System

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Date: 11-09-2009
Start Time: 6:00pm
End Time: 7:30pm
Speaker: Lisa Borland, Evnine and Associates
Location: New York Academy of Sciences: 7 World Trade Center, New York

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ABSTRACT

We study properties of the cross-sectional distribution of returns.

A significant anti-correlation between dispersion and cross-sectional kurtosis is found such that dispersion is high but kurtosis is low in panic times, and the opposite in normal times. The co-movement of stock returns also increases in panic times. We define a simple statistic s, the normalized sum of signs of returns on a given day, to capture the degree of correlation in the system. s can be seen as the order parameter of the system because if s = 0 there is no correlation (a disordered state), whereas for s different from 0 there is correlation among stocks (an ordered state).

We make an analogy to non-equilibrium phase transitions and hypothesize that financial markets undergo self-organization when the external volatility perception rises above some critical value. Indeed, the distribution of s is unimodal in normal times, shifting to bimodal in times of panic. This is consistent with a second order phase transition.

Simulations of a joint stochastic process for stocks use a multi timescale process in the temporal direction and an equation for the order parameter s for the dynamics of the cross-sectional correlation.

Numerical results show good qualitative agreement with the stylized facts of real data, in both normal and panic times.

BIO

Lisa Borland  is currently Director of Derivatives Strategies at Evnine and Associates, a San Francisco based hedge fund.  She received her Doctorate in  Theoretical Physics from the University of Stuttgart, Germany and after some years of working in academia in  the United States (Berkeley) and abroad (Brazil),  she moved  in to the field of finance.  She has over  30 scientific publications and  has been invited to speak at about as many international conferences.


Her most notable work in finance has been the development of a theory for  non-Gaussian option pricing. However, her main interest  is more general;  namely to try and understand  the dynamics of financial markets, and apply that knowledge to trading strategies and risk control.