Economics Mapping to the Renormalization Group Scaling of Stock Markets.pdfVIP

Economics Mapping to the Renormalization Group Scaling of Stock Markets Enrique Canessa∗ The Abdus Salam International Centre for Theoretical Physics, Trieste, Italy We make an attempt to map a simple economically motivated model for the price evolution [J. Phys. A: Gen. Math 33, 3637 (2000)] to the phe- nomenological renormalization group scaling of stock markets. This mapping 0 0 gives insight into the critical exponents and the renormalization group pre- 0 dictions for the log-periodic oscillations preceding some stock market crashes 2 from the perspective of non-linear changes in ‘the level of stocks’. g u A I. INTRODUCTION 1 2 1 Several papers have appeared in recent years showing increasing evidence that at least v 0 some market crashes are often anticipated by a power law behaviour of the stock market 0 3 index which fluctuates with oscillations that are periodic in the logarithm of the time to 8 0 crash (see, for example, [1–6]). From these observations, it has been argued that there is a 0 0 close relation between the stock market crashes and the renormalization group (RG) theory / t [1]. Precursory logarithm- (log-)periodic patterns can also emerge from percolation models a m- by applying the cluster concept to groups of investors acting collectively [7,8]. d n Though the RG approach has shown to model remarkably well the stock market time o c evolution and to predict the existence of a large price crash, a possible universality for : v the real exponents quantifying