We study the emergence of instabilities in a stylized model of a financial market, when different market actors calculate prices according to different (local) market measures. We derive typical properties for ensembles of large random markets using techniques borrowed from statistical mechanics of disordered systems. We show that, depending on the number of financial instruments available and on the heterogeneity of local measures, the market moves from an arbitrage-free phase to an unstable one, where the complexity of the market—as measured by the diversity of financial instruments—increases, and arbitrage opportunities arise. A sharp transition separates the two phases. Focusing on two different classes of local measures inspired by real market strategies, we are able to analytically compute the critical lines, corroborating our findings with numerical simulations.
Financial instability from local market measures
Livan, Giacomo;
2012-01-01
Abstract
We study the emergence of instabilities in a stylized model of a financial market, when different market actors calculate prices according to different (local) market measures. We derive typical properties for ensembles of large random markets using techniques borrowed from statistical mechanics of disordered systems. We show that, depending on the number of financial instruments available and on the heterogeneity of local measures, the market moves from an arbitrage-free phase to an unstable one, where the complexity of the market—as measured by the diversity of financial instruments—increases, and arbitrage opportunities arise. A sharp transition separates the two phases. Focusing on two different classes of local measures inspired by real market strategies, we are able to analytically compute the critical lines, corroborating our findings with numerical simulations.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
