A spring-block analogy for the dynamics of stock indexes

TL;DR

This paper introduces a spring-block mechanical model to simulate stock index dynamics, capturing key market phenomena like avalanches, return distributions, and gain-loss asymmetry, offering a pedagogical bridge between physics and economics.

Contribution

The paper presents a novel spring-block analogy that qualitatively reproduces various stylized facts of stock market behavior, linking physical models to financial dynamics.

Findings

Model reproduces the distribution of logarithmic returns

Captures avalanche-like phenomena in stock markets

Accounts for gain-loss asymmetry in inverse statistics

Abstract

A spring-block chain placed on a running conveyor belt is considered for modeling stylized facts observed in the dynamics of stock indexes. Individual stocks are modeled by the blocks, while the stock-stock correlations are introduced via simple elastic forces acting in the springs. The dragging effect of the moving belt corresponds to the expected economic growth. The spring-block system produces collective behavior and avalanche like phenomena, similar to the ones observed in stock markets. An artificial index is defined for the spring-block chain, and its dynamics is compared with the one measured for the Dow Jones Industrial Average. For certain parameter regions the model reproduces qualitatively well the dynamics of the logarithmic index, the logarithmic returns, the distribution of the logarithmic returns, the avalanche-size distribution and the distribution of the investment horizons. A noticeable success of the model is that it is able to account for the gain-loss asymmetry observed in the inverse statistics. Our approach has mainly a pedagogical value, bridging between a complex socio-economic phenomena and a basic (mechanical) model in physics.