Dion Harmon, Marcus A. M. de Aguiar, David D. Chinellato, Dan Braha, Irving R. Epstein, Yaneer Bar-Yam
Abstract
Predicting panic is of critical importance in many areas of human and animal behavior, notably in the context of economics. The recent financial crisis is a case in point. Panic may be due to a specific external threat, or self-generated nervousness. Here we show that the recent economic crisis and earlier large single-day panics were preceded by extended periods of high levels of market mimicry --- direct evidence of uncertainty and nervousness, and of the comparatively weak influence of external news. High levels of mimicry can be a quite general indicator of the potential for self-organized crises.
You can read about this paper at PhysOrg:
Since early October 2008, when the Dow Jones Industrial Average began its drop that reached a low point the following March, many questions have been raised - particularly about what caused the crash and if it could have been predicted and somehow prevented. Some possible answers involve market volatility, changes in regulations, bank failures, easy credit, or any combination of external influences and internal market dynamics. In a new study, research analysts have found another clue to stock market crashes: high levels of collective stock movements - or market mimicry - tend to precede crashes, which suggests that measuring the mimicry level of the market could provide significant advance warning of an impending stock market crash.