Correlations, Risk and Crisis: From Physiology to Finance

40 Pages Posted: 2 May 2009 Last revised: 4 May 2009

See all articles by Alexander N. Gorban

Alexander N. Gorban

University of Leicester, UK

Elena V. Smirnova

affiliation not provided to SSRN

Tatiana A. Tyukina

affiliation not provided to SSRN

Date Written: May 1, 2009

Abstract

We study the dynamics of correlation and variance in systems under the load of environmental factors. A universal effect in ensembles of similar systems under load of similar factors is described: in crisis, typically, even before obvious symptoms of crisis appear, correlation increases, and, at the same time, variance (and volatility) increases too. After the crisis achieves its bottom, it can develop into two directions: recovering (both correlations and variance decrease) or fatal catastrophe (correlations decrease, but variance not). This effect is supported by many experiments and observation of groups of humans, mice, trees, grassy plants, and on financial time series. A general approach to explanation of the effect through dynamics of adaptation is developed. Different organization of interaction between factors (Liebig's versus synergistic systems) lead to different adaptation dynamics. This gives an explanation to qualitatively different dynamics of correlation under different types of load.

Keywords: Correlations, Factor, Liebig’s Law, Synergy, Adaptation, Crisis Indicator

JEL Classification: C32, C69

Suggested Citation

Gorban, Alexander N. and Smirnova, Elena V. and Tyukina, Tatiana A., Correlations, Risk and Crisis: From Physiology to Finance (May 1, 2009). Available at SSRN: https://ssrn.com/abstract=1397677 or http://dx.doi.org/10.2139/ssrn.1397677

Alexander N. Gorban (Contact Author)

University of Leicester, UK ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Elena V. Smirnova

affiliation not provided to SSRN

Tatiana A. Tyukina

affiliation not provided to SSRN

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