Some politics and statistical physics behind Sri Lankan stock market crashes

Janak R. Wedagedera, W. Ajith Raveendra De Mel

Abstract


We investigate the mechanism of how the so called critical crashes happen in the stock market from a statistical physics point of view. We shall consider a modelling approach proposed in Johansen et al. (2000) to study the nature of a possible crash occurred in the Sri Lankan stock market in 1994 with a mentioning of the political events of the country that had been prevailing during that time which could be the key force that had driven the market towards the said crash. We shall determine the parameters that governed this crash and t a periodic function for the actual data based on the critical phenomena in statistical mechanics.
We also propose a modelling approach via which we illustrate the critical crashes in the market are not unusual phenomena when the market is modeled as a system in statistical physics, where we employ a version of Deridda's Random Energy Model Derrida (1980), Derrida (1997) applied to the price uctuations in the nancial market.

Full Text:

PDF

References


Bak P. 1996. How Nature Works: The Science of Self-Organized Criticality. Springer-Copernicus, New York.

Black, F. 1989. How we came up with the option formula. J. Portfolio management 15 4.

Buffet, E., A. Patrick, J. Pule. 1993. J. Phys. A 26 1823.

Derrida, B. 1980. Random-Energy Model: Limit of a Family of Disordered Models. Phys. Rev. Lett. 45 79.

Derrida, B. 1981. An exactly solvable model of disordered systems. Phys. Review B24 2613.

Derrida, B. 1985. J. Physique. Lett 46 L401.

Derrida, B. 1997. From random walks to spin glasses. Physica D 186{198.

Derrida, B., E. Gardner. 1985. Solution of the generalised random energy model. J. Phys C 19 2253{2274.

Derrida, B., H. Spohn. 1988. Polymers on disordered trees, spin glasses, and travelling waves. Jn. Stat. Physics 51 817{840.

Derrida B., De Seze L., Itzykson C. 1983. Fractal structure of zeros in heirachical models. Jnl. of Statisical Physics 33 559.

Dorlas, Tenuis C. 1999. Statistical Mechanics - Fundamental and Model Solutions. Institute of Physics Publishing London.

Ken Kiyono, Zhigniew R. Struzik, and Yoshiharu Yamamomoto 2006. Criticality and phase transition in stock-price

uctuations. Phys. Rev. Lett. 96 068701-1-068701-4.

Johansen A., Sornette D. 1998. Critical crashes are outliers. Eur. Phys. J. B1 141.

Paul, Wolfgang, Jorg Baschnagel. 1999. Stochastic Processes From Physics to Finance. Springer.

Schwabl, Franz. 2002. Statistical Mechanics. Springer-Verlag.

Sornette D., Bouchand JP., Johansen A. 1996. Stock market crashes, precurses and replicas. J. Phys I France 6 167{175.

Johansen A., Ledoit O., and Sornette D. 2000 Crashes as Critical Points Int. J. Theor. Applied Finance 3 219.

Williams, D. 1991. Probability with Martingales. Cambridge University Press.

Wolfram, S. 2004. http://www.wolfram.com.

Yeomans, JM. 1992. Statistical Mechanics of Phase Transistions. Oxford University Press.


Refbacks

  • There are currently no refbacks.


Creative Commons Licence
Ruhuna Journal of Science by University of Ruhuna is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

eISSN: 2536-8400

Print ISSN: 1800-279X (Before 2014)