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Hidden interactions in financial markets

Stavroglou, Stavros K. and Pantelous, Athanasios A. and Stanley, H. Eugene and Zuev, Konstantin M. (2019) Hidden interactions in financial markets. Proceedings of the National Academy of Sciences of the United States of America, 116 (22). pp. 10646-10651. ISSN 0027-8424. PMCID PMC6561208. https://resolver.caltech.edu/CaltechAUTHORS:20190513-145506904

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Abstract

The hidden nature of causality is a puzzling, yet critical notion for effective decision-making. Financial markets are characterized by fluctuating interdependencies which seldom give rise to emergent phenomena such as bubbles or crashes. In this paper, we propose a method based on symbolic dynamics, which probes beneath the surface of abstract causality and unveils the nature of causal interactions. Our method allows distinction between positive and negative interdependencies as well as a hybrid form that we refer to as “dark causality.” We propose an algorithm which is validated by models of a priori defined causal interaction. Then, we test our method on asset pairs and on a network of sovereign credit default swaps (CDS). Our findings suggest that dark causality dominates the sovereign CDS network, indicating interdependencies which require caution from an investor’s perspective.


Item Type:Article
Related URLs:
URLURL TypeDescription
https://doi.org/10.1073/pnas.1819449116DOIArticle
https://www.pnas.org/content/suppl/2019/05/08/1819449116.DCSupplementalPublisherSupporting Information
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6561208/PubMed CentralArticle
Additional Information:© 2019 National Academy of Sciences. Published under the PNAS license. Contributed by H. Eugene Stanley, February 28, 2019 (sent for review February 7, 2019; reviewed by Grigoris Kalogeropoulos and Eugene Neduv). We thank Dimitri K. Pandeleakis for his valuable support in developing the animations for Movie S1, and Nicholas S. Spyrison for his comments that significantly improved the presentation of this paper. S.K.S. and A.A.P. acknowledge the gracious support of this work by the Engineering and Physical Sciences Research Council and Economic and Social Research Council Centre for Doctoral Training on Quantification and Management of Risk and Uncertainty in Complex Systems and Environments (Grant EP/L015927/1). Author contributions: S.K.S., A.A.P., H.E.S., and K.M.Z. designed research; S.K.S., A.A.P., H.E.S., and K.M.Z. performed research; S.K.S., A.A.P., H.E.S., and K.M.Z. contributed new reagents/analytic tools; S.K.S. and A.A.P. analyzed data; and S.K.S., A.A.P., and H.E.S. wrote the paper. Reviewers: G.K., National and Kapodistrian University of Athens, Greece; and E.N., Columbia University. The authors declare no conflict of interest. This article contains supporting information online at www.pnas.org/lookup/suppl/doi:10.1073/pnas.1819449116/-/DCSupplemental.
Funders:
Funding AgencyGrant Number
Engineering and Physical Sciences Research Council (EPSRC)EP/L015927/1
Subject Keywords:financial markets; pattern causality; complex systems; sovereign CDS networks; pairs trading
Issue or Number:22
PubMed Central ID:PMC6561208
Record Number:CaltechAUTHORS:20190513-145506904
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20190513-145506904
Official Citation:Hidden interactions in financial markets. Stavros K. Stavroglou, Athanasios A. Pantelous, H. Eugene Stanley, Konstantin M. Zuev. Proceedings of the National Academy of Sciences May 2019, 116 (22) 10646-10651; DOI: 10.1073/pnas.1819449116
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:95450
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:14 May 2019 00:16
Last Modified:03 Oct 2019 21:13

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