‘Ordered Fear’ Plays a Strong Role in Market Chaos

The ScreamFrom ScienceDaily:

When the current financial crisis hit, the failure of traditional economic doctrines to provide any sort of early warning shocked not only financial experts worldwide, but also governments and the general public, and we all began to question the effectiveness and validity of those doctrines.A research team based in Israel decided to investigate what went awry, searching for order in an apparently random system. They report their findings in the American Institute of Physics’ journal AIP Advances.

The novelty of their study is the incorporation of time variation of “human factors” into mathematical analysis. The team, led by Dr. Yoash Shapira, former head of the Atomic Energy Commission Research and currently a guest scientist at Tel Aviv University, along with Eshel Ben-Jacob, a professor of physics, Tel Aviv University School of Physics and Astronomy, and his doctoral student Dror Y. Kenett, hypothesized that temporal order (arrangement of events in time) should be hidden in variables associated with fear, such as volatility.

They analyzed the volatility time series of 10 different stock markets from seven countries over a period of about 50 years and, rather than following traditional economic analyses, they analyzed time variations in the volatility — or the “volatility of volatility,” a.k.a. “fear volatility.”

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  • George M. Anderson

    So if I understand this right, markets are not only influenced by mathematical forces, but also by the humans that interact with the market on a day-to-day basis?  Brilliant!

    What is interesting is how they are talking about incorporating human interaction and quantifying it.  If they can do that…well…it will be interesting.
     

  • http://www.facebook.com/people/George-M-Anderson/1289313527 George M. Anderson

    So if I understand this right, markets are not only influenced by mathematical forces, but also by the humans that interact with the market on a day-to-day basis?  Brilliant!

    What is interesting is how they are talking about incorporating human interaction and quantifying it.  If they can do that…well…it will be interesting.
     

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