Featured Research

from universities, journals, and other organizations

Ordered fear plays a strong role in market chaos

Date:
June 8, 2011
Source:
American Institute of Physics
Summary:
When the current financial crisis hit, the failure of traditional economic doctrines to provide any sort of early warning shocked not only financial experts worldwide, but also governments and the general public, and we all began to question the effectiveness and validity of those doctrines. A research team based in Israel decided to investigate what went awry, searching for order in an apparently random system.

When the current financial crisis hit, the failure of traditional economic doctrines to provide any sort of early warning shocked not only financial experts worldwide, but also governments and the general public, and we all began to question the effectiveness and validity of those doctrines.

Related Articles


A research team based in Israel decided to investigate what went awry, searching for order in an apparently random system. They report their findings in the American Institute of Physics' journal AIP Advances.

The novelty of their study is the incorporation of time variation of "human factors" into mathematical analysis. The team, led by Dr. Yoash Shapira, former head of the Atomic Energy Commission Research and currently a guest scientist at Tel Aviv University, along with Eshel Ben-Jacob, a professor of physics, Tel Aviv University School of Physics and Astronomy, and his doctoral student Dror Y. Kenett, hypothesized that temporal order (arrangement of events in time) should be hidden in variables associated with fear, such as volatility.

They analyzed the volatility time series of 10 different stock markets from seven countries over a period of about 50 years and, rather than following traditional economic analyses, they analyzed time variations in the volatility -- or the "volatility of volatility," a.k.a. "fear volatility."

In all markets studied, analysis revealed the existence of hidden temporal order in the volatility and very high correlations between the volatility and the magnitude of price variations. This marks the first time hidden temporal order has been found in these market "human factors."

"To a non-economist, economic theories seem decoupled from human reality. The fundamental assumption is that investments are made rationally. But investors can behave irrationally -- driven largely by greed and fear, and other human factors," explains Ben-Jacob. "It's also odd that many mathematical analyses, such as the design of investment portfolios, assume no memory. It's assumed that stock prices behave with no apparent temporal order. Yet investors, including professional traders, take into account past behavior and are particularly influenced by the variation in prices or the volatility associated with the fear index."

The existence of such volatility order, or "ordered fear," implies that proper portfolio design should take into consideration the "volatility of volatility," according to the team. For example, the common approach to reducing risk is to select stocks with negative or low correlations in their sequence of returns. The new findings suggest that selection criteria should incorporate the correlations in the stocks' volatility dynamics.

"We're working on incorporating human factors into market analysis," Ben-Jacob says, "by constructing a new parameter to replace the traditional systemic risk parameter."


Story Source:

The above story is based on materials provided by American Institute of Physics. Note: Materials may be edited for content and length.


Journal Reference:

  1. Y. Shapira, D. Y. Kenett, Ohad Raviv, E. Ben-Jacob. Hidden temporal order unveiled in stock market volatility variance. AIP Advances, 2011; 1 (2): 022127 DOI: 10.1063/1.3598412

Cite This Page:

American Institute of Physics. "Ordered fear plays a strong role in market chaos." ScienceDaily. ScienceDaily, 8 June 2011. <www.sciencedaily.com/releases/2011/06/110608122819.htm>.
American Institute of Physics. (2011, June 8). Ordered fear plays a strong role in market chaos. ScienceDaily. Retrieved November 1, 2014 from www.sciencedaily.com/releases/2011/06/110608122819.htm
American Institute of Physics. "Ordered fear plays a strong role in market chaos." ScienceDaily. www.sciencedaily.com/releases/2011/06/110608122819.htm (accessed November 1, 2014).

Share This



More Computers & Math News

Saturday, November 1, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Protests Stall Hungary's Internet Tax

Protests Stall Hungary's Internet Tax

Reuters - Business Video Online (Oct. 31, 2014) Hungary will shelve plans to introduce a tax on internet data traffic that has generated big protests over the past week. But as Amy Pollock reports the controversial issue hasn’t gone away entirely. Video provided by Reuters
Powered by NewsLook.com
Samsung's Incredible Shrinking Smartphone Profits

Samsung's Incredible Shrinking Smartphone Profits

Reuters - Business Video Online (Oct. 30, 2014) The world's top mobile maker is under severe pressure, delivering a 60 percent drop in Q3 profit as its handset business struggles. Turning it around may not prove easy, says Reuters' Jon Gordon. Video provided by Reuters
Powered by NewsLook.com
Ban On Wearable Cameras In Movie Theaters Surprises No One

Ban On Wearable Cameras In Movie Theaters Surprises No One

Newsy (Oct. 30, 2014) The Motion Picture Association of America and the National Association of Theatre Owners now prohibit wearable cameras such as Google Glass. Video provided by Newsy
Powered by NewsLook.com
Spain's New 'Google Tax' Makes News Feeds Pay For Links

Spain's New 'Google Tax' Makes News Feeds Pay For Links

Newsy (Oct. 30, 2014) Spanish lawmakers have passed new IP rules requiring aggregators to pay for linking to news sites, following a broader trend across the E.U. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Space & Time

Matter & Energy

Computers & Math

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins