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Fear and its implications for stock markets

Author

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  • I. Simonsen
  • P. T.H. Ahlgren
  • M. H. Jensen
  • R. Donangelo
  • K. Sneppen

Abstract

The value of stocks, indices and other assets, are examples of stochastic processes with unpredictable dynamics. In this paper, we discuss asymmetries in short term price movements that can not be associated with a long term positive trend. These empirical asymmetries predict that stock index drops are more common on a relatively short time scale than the corresponding raises. We present several empirical examples of such asymmetries. Furthermore, a simple model featuring occasional short periods of synchronized dropping prices for all stocks constituting the index is introduced with the aim of explaining these facts. The collective negative price movements are imagined triggered by external factors in our society, as well as internal to the economy, that create fear of the future among investors. This is parameterized by a “fear factor” defining the frequency of synchronized events. It is demonstrated that such a simple fear factor model can reproduce several empirical facts concerning index asymmetries. It is also pointed out that in its simplest form, the model has certain shortcomings. Copyright EDP Sciences/Società Italiana di Fisica/Springer-Verlag 2007

Suggested Citation

  • I. Simonsen & P. T.H. Ahlgren & M. H. Jensen & R. Donangelo & K. Sneppen, 2007. "Fear and its implications for stock markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 57(2), pages 153-158, May.
    • Handle: RePEc:spr:eurphb:v:57:y:2007:i:2:p:153-158
    DOI: 10.1140/epjb/e2007-00125-4
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    References listed on IDEAS

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    1. Raul Donangelo & Mogens H. Jensen & Ingve Simonsen & Kim Sneppen, 2006. "Synchronization Model for Stock Market Asymmetry," Papers physics/0604137, arXiv.org, revised Aug 2006.
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    Cited by:

    1. Zou, Yongjie & Li, Honggang, 2014. "Time spans between price maxima and price minima in stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 395(C), pages 303-309.

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