Tremor Price Dynamics in the World’s Network of Stock Exchanges

7 Pages Posted: 20 Dec 2009

See all articles by Jorgen Vitting Andersen

Jorgen Vitting Andersen

CES, Université Paris 1 Panthéon-Sorbonne

Andrzej Nowak

University of Warsaw - Institute for Social Studies

Giulia Rotundo

Department of Statistical Sciences, Sapienza University of Rome

Lael Parrott

University of Montreal

Date Written: December 18, 2009

Abstract

We use insight from a model of earth techtonic plate movement to obtain a new understanding of the build up and release of stress in the price dynamics of the world’s stock exchanges. Nonlinearity enters the model due to a behavioral attribute of humans reacting disproportionately to big changes. This nonlinear response allows us to classify price movements of a given stock index as either being generated due to specific economic news for the country in question, or by the ensemble of the world’s stock exchanges reacting together like a complex system. Similar in structure to the Capital Asset Pricing Model in Finance, the model predicts how an individual stock exchange should be priced in terms of the performance of the global market of exchanges, but with human behavioral characteristics included in the pricing. A number of the model’s assumptions are validated against empirical data for 24 of the world’s leading stock exchanges. We show how threshold effects can lead to synchronization in the global network of stock exchanges.

Suggested Citation

Vitting Andersen, Jorgen and Nowak, Andrzej and Rotundo, Giulia and Parrott, Lael, Tremor Price Dynamics in the World’s Network of Stock Exchanges (December 18, 2009). Available at SSRN: https://ssrn.com/abstract=1525622 or http://dx.doi.org/10.2139/ssrn.1525622

Jorgen Vitting Andersen (Contact Author)

CES, Université Paris 1 Panthéon-Sorbonne ( email )

Maison des Sciences Economiques
106-112 Boulevard de l'Hôpital 75647 Paris Cedex
Paris, 75647
France

Andrzej Nowak

University of Warsaw - Institute for Social Studies ( email )

Stawki 5/7
Warsaw, 00 183
Poland

Giulia Rotundo

Department of Statistical Sciences, Sapienza University of Rome ( email )

Piazzale Aldo Moro, 5
Rome, 00185
Italy

Lael Parrott

University of Montreal

C.P. 6128 succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

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