Collective behavior in financial market

TL;DR

This paper investigates collective behavior in financial markets by analyzing network synchronization of stock correlations, revealing that crises induce a synchronized state characterized by shortened network distances.

Contribution

It introduces a novel approach using network synchronization concepts to quantify collective dynamics and identifies key topological features influencing market synchronization during crises.

Findings

Market synchronization increases during crises

Average shortest path length correlates with synchronization

Stock prices tend to move collectively during economic downturns

Abstract

Financial market is an example of complex system, which is characterized by a highly intricate organization and the emergence of collective behavior. In this paper, we quantify this emergent dynamics in the financial market by using concepts of network synchronization. We consider networks constructed by the correlation matrix of asset returns and study the time evolution of the phase coherence among stock prices. It is verified that during financial crisis a synchronous state emerges in the system, defining the market's direction. Furthermore, the paper proposes a statistical regression model able to identify the topological features that mostly influence such an emergence. The coefficients of the proposed model indicate that the average shortest path length is the measurement most related to network synchronization. Therefore, during economic crisis, the stock prices present a similar evolution, which tends to shorten the distances between stocks, indication a collective dynamics.