Phase Transitions, Renormalization and Yang-Lee Zeros in Stock Markets

TL;DR

This paper explores the analogy between thermodynamics and economics, demonstrating how phase transition and renormalization theories can model and predict trend changes in stock markets.

Contribution

It introduces a novel framework applying thermodynamic phase transition and renormalization concepts to understand stock market dynamics.

Findings

Thermodynamic principles can model economic phenomena.

Phase transitions relate to stock market trend changes.

Renormalization helps predict market shifts.

Abstract

The present paper analyses the formal parallelism existing between the laws of thermodynamics and some economic principles. Based on previous works, we shall show how the existence in Economics of principles analogous to those in thermodynamics involves the occurrence of economic events that remind of well-known phenomenological thermodynamic paradigms (i.e., the magnetocaloric effect and population inversion). We shall also show how the phase transition and renormalization theory provides a natural framework to understand and predict trend changes in stock markets. Finally, current negotiation strategies in financial markets are briefly reviewed.