Contagion in the world's stock exchanges seen as a set of coupled oscillators

TL;DR

This paper models global stock exchange contagion as coupled oscillators, incorporating behavioral traits and time-scale separation, enabling identification of contagion sources and network vulnerabilities without traditional causality tests.

Contribution

It introduces a novel integrate-and-fire oscillator model for stock exchanges that captures contagion dynamics and behavioral effects, validated with market data.

Findings

Model accurately reproduces contagion phenomena

Identifies key nodes influencing contagion onset

Detects periods of high network vulnerability

Abstract

We study how the phenomenon of contagion can take place in the network of the world's stock exchanges due to the behavioral trait "blindeness to small changes". On large scale individual, the delay in the collective response may significantly change the dynamics of the overall system. We explicitely insert a term describing the behavioral phenomenon in a system of equations that describe the build and release of stress across the worldwide stock markets. In the mathematical formulation of the model, each stock exchange acts as an integrate-and-fire oscillator. Calibration on market data validate the model. One advantage of the integrate-and-fire dynamics is that it enables for a direct identification of cause and effect of price movements, without the need for statistical tests such as for example Granger causality tests often used in the identification of causes of contagion. Our methodology can thereby identify the most relevant nodes with respect to onset of contagion in the network of stock exchanges, as well as identify potential periods of high vulnerability of the network. The model is characterized by a separation of time scales created by a slow build up of stresses, for example due to (say monthly/yearly) macroeconomic factors, and then a fast (say hourly/daily) release of stresses through "price-quakes" of price movements across the worlds network of stock exchanges.