Micro and Macro Benefits of Random Investments in Financial Markets

TL;DR

This paper explores how randomness in investment strategies can benefit financial markets by reducing extreme events like bubbles and crashes, using statistical physics models and network simulations.

Contribution

It introduces a Self-Organized Criticality model to analyze the impact of random strategies on market stability and proposes policy suggestions for risk mitigation.

Findings

Random strategies can reduce the frequency of financial crashes.

Power-law wealth distributions emerge in network models.

Random investments can mitigate extreme market events.

Abstract

In this paper, making use of recent statistical physics techniques and models, we address the specific role of randomness in financial markets, both at the micro and the macro level. In particular, we review some recent results obtained about the effectiveness of random strategies of investment, compared with some of the most used trading strategies for forecasting the behavior of real financial indexes. We also push forward our analysis by means of a Self-Organized Criticality model, able to simulate financial avalanches in trading communities with different network topologies, where a Pareto-like power law behavior of wealth spontaneously emerges. In this context, we present new findings and suggestions for policies based on the effects that random strategies can have in terms of reduction of dangerous financial extreme events, i.e. bubbles and crashes.