Flash Crashes, Information Processing Limits, and Phase Transitions

34 Pages Posted: 30 Mar 2016 Last revised: 9 Jun 2016

See all articles by Edgar Parker

Edgar Parker

New York Life Insurance Company

Date Written: March 29, 2016

Abstract

While a wide variety of causes have been offered to explain the anomalous market phenomena known as a “Flash Crash,” there is as of yet no consensus among financial experts as to the sources of these sudden market collapses. In contrast to the behavior expected from standard financial theory, both the equity and bond markets have been thrown into freefall in the absence of any significant news event. The author posits that information theory offers a relatively simple explanation of the causes of some of these dramatic events. This new avenue of research also suggests new policies or measures to lower the probability of occurrence and to mitigate the effects of these extreme events.

Keywords: Information Theory, financial engineering, yield curve, econophysics, entropy, implied volatility

JEL Classification: G1, G12, G14, G170, D84, E43

Suggested Citation

Parker, Edgar, Flash Crashes, Information Processing Limits, and Phase Transitions (March 29, 2016). Available at SSRN: https://ssrn.com/abstract=2756309 or http://dx.doi.org/10.2139/ssrn.2756309

Edgar Parker (Contact Author)

New York Life Insurance Company ( email )

51 Madison Avenue
New York, NY 10010
United States

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