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Three Different Ways Synchronization Can Cause Contagion in Financial Markets

Author

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  • Naji Massad

    (Centre d’Economie de la Sorbonne, Université Paris 1 Pantheon-Sorbonne, Maison des Sciences Economiques, 106-112 Boulevard de l’Hôpital, 75647 Paris, CEDEX 13, France)

  • Jørgen Vitting Andersen

    (Centre d’Economie de la Sorbonne, Université Paris 1 Pantheon-Sorbonne, Maison des Sciences Economiques, 106-112 Boulevard de l’Hôpital, 75647 Paris, CEDEX 13, France
    CNRS and Centre d’Economie de la Sorbonne, Université Paris 1 Pantheon-Sorbonne, Maison des Sciences Economiques, 106-112 Boulevard de l’Hôpital, 75647 Paris, CEDEX 13, France)

Abstract

We introduce tools to capture the dynamics of three different pathways, in which the synchronization of human decision-making could lead to turbulent periods and contagion phenomena in financial markets. The first pathway is caused when stock market indices, seen as a set of coupled integrate-and-fire oscillators, synchronize in frequency. The integrate-and-fire dynamics happens due to “change blindness”, a trait in human decision-making where people have the tendency to ignore small changes, but take action when a large change happens. The second pathway happens due to feedback mechanisms between market performance and the use of certain (decoupled) trading strategies. The third pathway occurs through the effects of communication and its impact on human decision-making. A model is introduced in which financial market performance has an impact on decision-making through communication between people. Conversely, the sentiment created via communication has an impact on financial market performance. The methodologies used are: agent based modeling, models of integrate-and-fire oscillators, and communication models of human decision-making.

Suggested Citation

  • Naji Massad & Jørgen Vitting Andersen, 2018. "Three Different Ways Synchronization Can Cause Contagion in Financial Markets," Risks, MDPI, vol. 6(4), pages 1-13, September.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:4:p:104-:d:171293
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    References listed on IDEAS

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    3. Krzysztof Brania & Henryk Gurgul, 2021. "Contagion effects on capital and forex markets around GFC and COVID-19 crises. A comparative study," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 31(2), pages 59-92.
    4. Matteo Cinelli & Giovanna Ferraro & Antonio Iovanella & Giulia Rotundo, 2021. "Assessing the impact of incomplete information on the resilience of financial networks," Annals of Operations Research, Springer, vol. 299(1), pages 721-745, April.

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