Bifurcation patterns of market regime transition

TL;DR

This paper explores nonlinear bifurcation mechanisms in market regime transitions, identifying slow and fast bifurcations with precursors, and demonstrates their effectiveness through currency market simulations.

Contribution

It introduces a novel framework linking bifurcation theory with market regime shifts, including new precursors and a diffusion time scaling approach.

Findings

Slow bifurcation causes equilibrium evolution with stability loss delay.

Fast bifurcation involves fusion of stable and unstable states.

Precursor signals effectively predict regime changes in currency markets.

Abstract

In this paper mechanisms of reversion - momentum transition are considered. Two basic nonlinear mechanisms are highlighted: a slow and fast bifurcation. A slow bifurcation leads to the equilibrium evolution, preceded by stability loss delay of a control parameter. A single order parameter is introduced by Markovian chain diffusion, which plays a role of a precursor. A fast bifurcation is formed by a singular fusion of unstable and stable equilibrium states. The effect of a precatastrophic range compression is observed before the discrete change of a system. A diffusion time scaling is presented as a precursor of the fast bifurcation. The efficiency of both precursors in a currency market was illustrated by simulation of a prototype of a trading system.