Measuring switching processes in financial markets with the Mean-Variance spin glass approach

TL;DR

This paper applies a physics-inspired Mean-Variance spin glass model to analyze financial markets, using portfolio alignment and magnetization to detect market turmoils and states.

Contribution

It introduces a novel approach combining spin glass physics with financial modeling to measure market states and identify turmoil signals.

Findings

Magnetization correlates with market turbulence.

Spin glass model effectively detects market shifts.

Portfolio alignment indicates market stability or turmoil.

Abstract

In this article we use the Mean-Variance Model in order to measure the current market state. In our study we take the approach of detecting the overall alignment of portfolios in the spin picture. The projection to the ground-states enables us to use physical observables in order to describe the current state of the explored market. The defined magnetization of portfolios shows cursor effects, which we use to detect turmoils.