Three Different Ways Synchronization Can Cause Contagion in Financial Markets

13 Pages Posted: 21 Mar 2019

See all articles by Naji Massad

Naji Massad

affiliation not provided to SSRN

Jorgen Vitting Andersen

CES, Université Paris 1 Panthéon-Sorbonne

Date Written: February 27, 2019

Abstract

We introduce tools to capture the dynamics of three different pathways, in which the synchronization of human decision-making could lead to turbulent periods and contagion phenomena in financial markets. The first pathway is caused when stock market indices, seen as a set of coupled integrate-and-fire oscillators, synchronize in frequency. The integrate-and-fire dynamics happens due to “change blindness”, a trait in human decision-making where people have the tendency to ignore small changes, but take action when a large change happens. The second pathway happens due to feedback mechanisms between market performance and the use of certain (decoupled) trading strategies. The third pathway occurs through the effects of communication and its impact on human decision-making. A model is introduced in which financial market performance has an impact on decision-making through communication between people. Conversely, the sentiment created via communication has an impact on financial market performance. The methodologies used are: agent based modeling, models of integrate-and-fire oscillators, and communication models of human decision-making.

Keywords: synchronization, human decision making, decoupling, opinion formation, agent-based modeling

JEL Classification: G, G01, G02

Suggested Citation

Massad, Naji and Vitting Andersen, Jorgen, Three Different Ways Synchronization Can Cause Contagion in Financial Markets (February 27, 2019). Available at SSRN: https://ssrn.com/abstract=3343761 or http://dx.doi.org/10.2139/ssrn.3343761

Naji Massad

affiliation not provided to SSRN

Jorgen Vitting Andersen (Contact Author)

CES, Université Paris 1 Panthéon-Sorbonne ( email )

Maison des Sciences Economiques
106-112 Boulevard de l'Hôpital 75647 Paris Cedex
Paris, 75647
France

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