Preprint Review Version 1 This version is not peer-reviewed

Three Different Ways Synchronization can Cause Contagion in Financial Markets

Version 1 : Received: 28 August 2018 / Approved: 29 August 2018 / Online: 29 August 2018 (00:57:01 CEST)

A peer-reviewed article of this Preprint also exists.

Massad, N.; Andersen, J.V. Three Different Ways Synchronization Can Cause Contagion in Financial Markets. Risks 2018, 6, 104. Massad, N.; Andersen, J.V. Three Different Ways Synchronization Can Cause Contagion in Financial Markets. Risks 2018, 6, 104.

Journal reference: Risks 2018, 6, 104
DOI: 10.3390/risks6040104

Abstract

We introduce tools to capture the dynamics of three different pathways, in which the synchronization of human decision making could lead to turbulent periods and contagion phenomena in financial markets. The first pathway is caused when stock market indices, seen as a set of coupled integrate-and-fire oscillators, synchronize in frequency. The integrate-and-fire dynamics happens due to "change blindness", a trait in human decision making where people have the tendency to ignore small changes, but take action when a large change happens. The second pathway happens due to feedback mechanisms between market performance and the use of certain (decoupled) trading strategies. The third pathway occurs through the effects of communication and its impact on human decision making. A model is introduced in which financial market performance has an impact on decision making through communication between people. Conversely, the sentiment created via communication has an impact on financial market performance.

Subject Areas

synchronization; human decision makin; decoupling; opinion formation; agent-based modeling

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