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Random magnets and correlations of stock price fluctuations

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  • Rosenow, Bernd
  • Gopikrishnan, Parameswaran
  • Plerou, Vasiliki
  • Stanley, H.Eugene

Abstract

Random magnets provide a paradigm for the study of competing interactions and frustration in physics. Here, we suggest that this paradigm is also useful for the study and explanation of correlations between stock price changes of different companies: it (i) provides for a mechanism to explain the origin of correlations, (ii) allows to understand the occurrence of power-law correlations in the time series of highly correlated eigenmodes, and (iii) is a useful framework for the analysis of optimal investment strategies where the knowledge of (anti-)correlations is an important prerequisite for the reduction of risk.

Suggested Citation

  • Rosenow, Bernd & Gopikrishnan, Parameswaran & Plerou, Vasiliki & Stanley, H.Eugene, 2002. "Random magnets and correlations of stock price fluctuations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 314(1), pages 762-767.
    • Handle: RePEc:eee:phsmap:v:314:y:2002:i:1:p:762-767
    DOI: 10.1016/S0378-4371(02)01049-X
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    Cited by:

    1. 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.
    2. 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.
    3. Bury, Thomas, 2013. "Market structure explained by pairwise interactions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(6), pages 1375-1385.

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