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Self-organized model of cascade spreading

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  • S. Gualdi
  • M. Medo
  • Y.-C. Zhang

Abstract

We study simultaneous price drops of real stocks and show that for high drop thresholds they follow a power-law distribution. To reproduce these collective downturns, we propose a minimal self-organized model of cascade spreading based on a probabilistic response of the system elements to stress conditions. This model is solvable using the theory of branching processes and the mean-field approximation. For a wide range of parameters, the system is in a critical state and displays a power-law cascade-size distribution similar to the empirically observed one. We further generalize the model to reproduce volatility clustering and other observed properties of real stocks. Copyright EDP Sciences, SIF, Springer-Verlag Berlin Heidelberg 2011

Suggested Citation

  • S. Gualdi & M. Medo & Y.-C. Zhang, 2011. "Self-organized model of cascade spreading," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 79(1), pages 91-98, January.
    • Handle: RePEc:spr:eurphb:v:79:y:2011:i:1:p:91-98
    DOI: 10.1140/epjb/e2010-10668-8
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    References listed on IDEAS

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