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Self-organized model of cascade spreading

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Abstract.

We study simultaneous price drops of real stocks and show that for high drop thresholds they follow a power-law distribution. To reproduce these collective downturns, we propose a minimal self-organized model of cascade spreading based on a probabilistic response of the system elements to stress conditions. This model is solvable using the theory of branching processes and the mean-field approximation. For a wide range of parameters, the system is in a critical state and displays a power-law cascade-size distribution similar to the empirically observed one. We further generalize the model to reproduce volatility clustering and other observed properties of real stocks.

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Authors and Affiliations

  1. Physics Department, University of Fribourg, 1700, Fribourg, Switzerland

    S. Gualdi, M. Medo & Y.-C. Zhang

Authors
  1. S. Gualdi
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  2. M. Medo
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  3. Y.-C. Zhang
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Correspondence to M. Medo.

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Gualdi, S., Medo, M. & Zhang, YC. Self-organized model of cascade spreading. Eur. Phys. J. B 79, 91–98 (2011). https://doi.org/10.1140/epjb/e2010-10668-8

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  • DOI: https://doi.org/10.1140/epjb/e2010-10668-8

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