Speaker: Yu Chen, The University of Tokyo.

Time: 10:00 am, Saturday, Jan 5, 2013
Venue: Conference Room, 4th Floor #5 Building, General Department of ISCAS
Contact: WANG Hao (wanghao@iscas.ac.cn) LV Pin (lvpin@iscas.ac.cn)

 

Abstract:
The global financial crisis (GFC) is specifically defined as the synchronized crashes of stock indices in multiple countries in the current study. Recently, agent-based models have been applied to study GFC, emphasizing the role played by the so-called global managers.

We introduced in our study two factors which reflect the characteristics of GFC. The first one, similar to the previous study, is the frequency of the synchronized crashes occurring in the time series of prices. The second one is the time evolution of realized correlation between the two stock indices, which is found by investigating daily indices data in various countries during the periods of Lehman shock in 2008 and Asian financial crises in 1997. In particular, a sharp rise of the correlation coefficient right before GFC, as well as a period of strong correlation after the shock is discerned. On the other hand, we also found that the agent-based model only with portfolio and local managers could not be used to explain this peculiar observation. To understand the time evolution of the correlation coefficient of stock indices, we suggest that a new kind of managers, namely the so-called informed local managers have to be taken into account. Informed local managers are defined as agents who trade locally, meanwhile, being aware of the risk of neighboring markets. A cognitive model for the evaluation of risk is established. By employing a threshold and a memory curve, the hysteresis behavior in the risk recognition is formulated for the informed local managers. Simulations with the suggested model remarkably recovered the peculiar behavior of correlation coefficient before and after the synchronized crashes. The key role played by the informed local managers and their interactions with the global managers in GFC are revealed. Furthermore, an interesting scenario to reason the eruption of GFC is identified: If a crash occurred in a particular market, with a scale large enough so that the informed managers in another market start to count the risk in this market, the two markets could become more correlated. Unluckily if a second crash took place in this period, the shock could immediately propagate to the other market so as to trigger crashes in all markets.