Hidden interactions in financial markets

Stavros K. Stavroglou, Athanasios A. Pantelous, H. Eugene Stanley, Konstantin M. Zuev

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

The hidden nature of causality is a puzzling, yet critical notion for effective decision-making. Financial markets are characterized by fluctuating interdependencies which seldom give rise to emergent phenomena such as bubbles or crashes. In this paper, we propose a method based on symbolic dynamics, which probes beneath the surface of abstract causality and unveils the nature of causal interactions. Our method allows distinction between positive and negative interdependencies as well as a hybrid form that we refer to as “dark causality.” We propose an algorithm which is validated by models of a priori defined causal interaction. Then, we test our method on asset pairs and on a network of sovereign credit default swaps (CDS). Our findings suggest that dark causality dominates the sovereign CDS network, indicating interdependencies which require caution from an investor’s perspective.
Original languageEnglish
Pages (from-to)10646-10651
Number of pages6
JournalProceedings of the National Academy of Sciences (PNAS)
Volume116
Issue number22
Early online date13 May 2019
DOIs
Publication statusPublished - 28 May 2019

Keywords / Materials (for Non-textual outputs)

  • financial markets
  • pattern causality
  • complex systems
  • sovereign CDS networks
  • pairs trading

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