The $-game

We propose a payoff function extending Minority Games (MG) that captures the competition between agents to make money. In contrast with previous MG, the best strategies are not always targeting the minority but are shifting opportunistically between the minority and the majority. The emergent properties of the price dynamics and of the wealth of agents are strikingly different from those found in MG. As the memory of agents is increased, we find a phase transition between a self-sustained speculative phase in which a “stubborn majority” of agents effectively collaborate to arbitrage a market-maker for their mutual benefit and a phase where the market-maker always arbitrages the agents. A subset of agents exhibit a sustained non-equilibrium risk-return profile. Received 5 June 2002 / Received in final form 21 November 2002 Published online 27 January 2003 RID="a" ID="a"e-mail: sornette@unice.fr RID="b" ID="b"CNRS UMR7536 RID="c" ID="c"CNRS UMR6622     

Minimal agent based model for financial markets I

We introduce a minimal agent based model for financial markets to understand the nature and self-organization of the stylized facts. The model is minimal in the sense that we try to identify the essential ingredients to reproduce the most important deviations of price time series from a random walk behavior. We focus on four essential ingredients: fundamentalist agents which tend to stabilize the market; chartist agents which induce destabilization; analysis of price behavior for the two strategies; herding behavior which governs the possibility of changing strategy. Bubbles and crashes correspond to situations dominated by chartists, while fundamentalists provide a long time stability (on average). The stylized facts are shown to correspond to an intermittent behavior which occurs only for a finite value of the number of agents N. Therefore they correspond to finite size effects which, however, can occur at different time scales. We propose a new mechanism for the self-organization of this state which is linked to the existence of a threshold for the agents to be active or not active. The feedback between price fluctuations and number of active agents represents a crucial element for this state of self-organized intermittency. The model can be easily generalized to consider more realistic variants.     

Extracting the exponential behaviors in the market data

We introduce a mathematical criterion defining the bubbles or the crashes in financial market price fluctuations by considering exponential fitting of the given data. By applying this criterion we can automatically extract the periods in which bubbles and crashes are identified. From stock market data of so-called the Internet bubbles it is found that the characteristic length of bubble period is about 100 days.     

Diagnosis and prediction of rebounds in financial markets

We introduce the concept of “negative bubbles” as the mirror (but not necessarily exactly symmetric) image of standard financial bubbles, in which positive feedback mechanisms may lead to transient accelerating price falls. To model these negative bubbles, we adapt the Johansen-Ledoit-Sornette (JLS) model of rational expectation bubbles with a hazard rate describing the collective buying pressure of noise traders. The price fall occurring during a transient negative bubble can be interpreted as an effective random down payment that rational agents accept to pay in the hope of profiting from the expected occurrence of a possible rally. We validate the model by showing that it has significant predictive power in identifying the times of major market rebounds. This result is obtained by using a general pattern recognition method that combines the information obtained at multiple times from a dynamical calibration of the JLS model. Error diagrams, Bayesian inference and trading strategies suggest that one can extract genuine information and obtain real skill from the calibration of negative bubbles with the JLS model. We conclude that negative bubbles are in general predictably associated with large rebounds or rallies, which are the mirror images of the crashes terminating standard bubbles.     

On the maximum drawdown during speculative bubbles

A taxonomy of large financial crashes proposed in the literature locates the burst of speculative bubbles due to endogenous causes in the framework of extreme stock market crashes, defined as falls of market prices that are outlier with respect to the bulk of drawdown price movement distribution. This paper goes on deeper in the analysis providing a further characterization of the rising part of such selected bubbles through the examination of drawdown and maximum drawdown movement of indices prices. The analysis of drawdown duration is also performed and it is the core of the risk measure estimated here.     

Time series analysis and long range correlations of Nordic spot electricity market data

The electricity system price of the Nord Pool spot market is analysed. Different time scale analysis tools are assessed with focus on the Hurst exponent and long range correlations. Daily and weekly periodicities of the spot market are identified. Even though space time separation plots suggest more stationary behaviour than other financial time series, we find large fluctuations of the spot price market which suggest time-dependent scaling parameters.     

Phase transitions in lyotropic nematic gels

In this paper, we discuss the equilibrium phases and collapse transitions of a lyotropic nematic gel immersed in an isotropic solvent. A nematic gel consists of a cross-linked polymer network with rod-like molecules embedded in it. Upon decreasing the quality of the solvent, we find that a lyotropic nematic gel undergoes a discontinuous volume change accompanied by an isotropic-nematic transition. We also present phase diagrams that these systems may exhibit. In particular, we show that coexistence of two isotropic phases, of two nematic phases, or of an isotropic and a nematic phase can occur. Received 15 February 2002 and Received in final form 14 June 2002     

Interactions and correlations of particulate inclusions in a columnar phase

We calculate the elastic-field-mediated interaction between macroscopic particles in a columnar hexagonal phase. The interaction is found to be long-ranged and non-central, with both attractive and repulsive parts. We show how the interaction modifies the particle correlations and the column fluctuations. We also calculate the interaction of particles with the topological defects of the columnar phase. The particle-defect interaction reduces the mobility of the defects. Received 14 March 2002 and Received in final form 13 August 2002 RID="a" ID="a"e-mail: rjoy@physics.iisc.ernet.in     

Experimental study of cracking induced by desiccation in 1-dimensional systems

We designed a simple experiment to study both the dynamical and statistical properties of cracking that occurs in a one-dimensional system composed of wet clay (or similar material) exposed to shrinkage induced by desiccation. We study both the dynamical formation of cracks and the statistical characteristics of the final cracks pattern. We observe that the drying rate has a strong influence on the way cracks appear and grow. We find that the final crack width is related to the order of apparition of the cracks. We discuss the statistical distributions of cracks width and separation between two adjacent cracks. We also study the correlations between these two quantities. Our results are compared to the predictions of existing models. Finally, a comparison with another kind of clay is made. Received 6 May 2002 and Received in final form 5 July 2002     

Stock market crashes are outliers

We call attention against what seems to be a widely held misconception according to which large crashes are the largest events of distributions of price variations with fat tails. We demonstrate on the Dow Jones Industrial Average that with high probability the three largest crashes in this century are outliers. This result supports the suggestion that large crashes result from specific amplification processes that might lead to observable pre-cursory signatures. Received and Revised: 30 November 1997 / Accepted: 8 December 1997     

Economic mapping to the renormalization group scaling of stock markets

We make an attempt to map a simple economically motivated model for price evolution [J. Phys. A 33, 3637 (2000)] to the phenomenological renormalization group scaling of stock markets. This mapping gives insight into the critical exponents and the renormalization group predictions for the log-periodic oscillations preceding some stock market crashes from the perspective of non-linear changes in `the level of stock'. Received 7 August 2000     

Resonances and spectral properties of detuned OPOs pumped by fluctuating sources

Twin-beam fluctuations are analyzed for detuned and mismatched OPO configurations. Resonances and frequency responses to the quantum noise sources (quantum and pump amplitude/phase fluctuations) are examined as functions of cavity decay rates, excitation parameters and detuning. The dependence of self- and mutual correlations of beam amplitudes and phases on detuning, mismatch and damping parameters is discussed. Received: 25 January 2002 / Revised version: 28 May 2002 / Published online: 15 November 2002 RID="*" ID="*"Corresponding author. Fax: +39-81/676-346, E-mail: alberto.porzio@na.infn.it     

The subtle nature of financial random walks

We first review the most important "stylized facts" of financial time series, that turn out to be, to a large extent, universal. We then recall how the multifractal random walk of Bacry, Muzy, and Delour generalizes the standard model of financial price changes and accounts in an elegant way for many of their empirical properties. In a second part, we provide empirical evidence for a very subtle compensation mechanism that underlies the random nature of price changes. This compensation drives the market close to a critical point, that may explain the sensitivity of financial markets to small perturbations, and their propensity to enter bubbles and crashes. We argue that the resulting unpredictability of price changes is very far from the neoclassical view that markets are informationally efficient.     

A generalized spin model of financial markets

We reformulate the Cont-Bouchaud model of financial markets in terms of classical “super-spins” where the spin value is a measure of the number of individual traders represented by a portfolio manager of an investment agency. We then extend this simplified model by switching on interactions among the super-spins to model the tendency of agencies getting influenced by the opinion of other managers. We also introduce a fictitious temperature (to model other random influences), and time-dependent local fields to model a slowly changing optimistic or pessimistic bias of traders. We point out close similarities between the price variations in our model with N super-spins and total displacements in an N-step Levy flight. We demonstrate the phenomena of natural and artificially created bubbles and subsequent crashes as well as the occurrence of “fat tails” in the distributions of stock price variations. Received 13 October 1998     

Buying on margin,selling short in an agent-based market model

Credit trading, or leverage trading, which includes buying on margin and selling short, plays an important role in financial markets, where agents tend to increase their leverages for increased profits. This paper presents an agent-based asset market model to study the effect of the permissive leverage level on traders’ wealth and overall market indicators. In this model, heterogeneous agents can assume fundamental value-converging expectations or trend-persistence expectations, and their effective demands of assets depend both on demand willingness and wealth constraints, where leverage can relieve the wealth constraints to some extent. The asset market price is determined by a market maker, who watches the market excess demand, and is influenced by noise factors. By simulations, we examine market results for different leverage ratios. At the individual level, we focus on how the leverage ratio influences agents’ wealth accumulation. At the market level, we focus on how the leverage ratio influences changes in the asset price, volatility, and trading volume. Qualitatively, our model provides some meaningful results supported by empirical facts. More importantly, we find a continuous phase transition as we increase the leverage threshold, which may provide a further prospective of credit trading.     

Symmetry alteration of ensemble return distribution in crash and rally days of financial markets

We select the n stocks traded in the New York Stock Exchange and we form a statistical ensemble of daily stock returns for each of the k trading days of our database from the stock price time series. We study the ensemble return distribution for each trading day and we find that the symmetry properties of the ensemble return distribution drastically change in crash and rally days of the market. In crash and rally days, the distribution becomes asymmetric. In particular for crashes the positive tail is steeper than the negative one whereas the reverse is observed in rally days. Received 25 February 2000