Econophys 15

Is there any connection between the network morphology and the fluctuations of
the stock market index?
F.M. Stefan, A.P.F. Atman
Allbens ATMAN Picardi Faria

Departamento de Física e Matemática and
National Institute for Science and Technology
INCT – Complex Systems – CEFET-MG
A.P.F.Atman, Is there any connection between the network..., ECONOPHYS'15, Prague , 14 - 16 September 2015.
Outline
Motivation
Econophysics: why? Who cares?
The “Market”:Is
“Market”: it a complex system?
Tools:
Cellular Automata:
Automata agent based model.
Behavioral Finance: psycological aspects.
Complex Networks:
Networks morphology matters!
A behavioral cellular automata model to reproduce the complexity of the market index
Psycological “driving forces” of the market
Dependence of the index fluctuations with the trust network morphology

Driving forces can change their effect depending on the trust network morphology!
EconoPhysics
Objective:
understand and predict the risk, correlations and
randomness associated to the financial markets.
Methods:
Methods
Multidisciplinary approach (statistics, probability
theory, stochastic process, dynamical systems,
simulation) using statistical mechanics tools to
analyze data from financial market, such as market
indexes temporal series or behavioral aspects of the
economic agents.
But, is the financial market predictable?
Can we model the market as a complex system?
What is econophysics?
Complex systems Computational Economic,
theory physics finance
Methodology Numerical tools Empirical data
Econophysics
Fractais e AC´s, Semana de C&T Cefet MG, 02 de ou

Complex Systems
Definition (?):
Systems made by unities, identical or not, which interact each other usually in
non-linear way, forming peculiar networks which exhibits emerging

properties not predictable from the analysis of the individual behavior of their
components.
The hability of these systems to display unexpected macroscopic

effects
due to synergetic association of the microscopic components imply that, frequently,
criticality chaos, fractals,
phenomena as self-organized criticality, fractals scaling and pow er laws
etc. are observed on these systems
Financial markets as complex systems!*
1. Open systems
Complex systems Financial markets
2. Multi agent
3. Adaptive and self-
organizing
4. Scale invariance
5. No central control Emerging properties??
Quotes of GBP/USD in different scales
2 hours quotes Weekly quotes Monthly quotes
* Slide modified from:

Detection of financial crisis by methods of multifractal analysis,
I. Agaev
Department of Computational Physics – Saint-Petersburg State University
Several examples can be found on different areas, from geological and
natural phenomena, as weather or earthquake prediction, to the analysis of
financial time series in order to predict the next crash of the market...
… with a such wide range of possibilities, a crucial

question raises naturally for a physicist: which are the
essential features needed to complexity emerges?
Dare to answer??
→ ask first to Statistical Mechanics!!!
By the way...
in the last years, SM have experienced a small revolution due to

the discovery of the essential role played in the scenario by the
Small World Networks!
Motivation:
Competition among memes in a world with limited attention, L. Weng, A. Flammini, A.

Vespignani & F. Menczer Scientific Reports 2, Article number: 335 (2012)
The Model: a hybrid Cellular Automata.
The CA is defined on a regular lattice in two dimensions, with

periodic boundary conditions on both directions;
Each site corresponds to an agent (investor) which can be in three

different states: Buying, Selling or Holding stocks.
The trust network of each investor is defined as its neighborhood.

The regular case corresponds to the Moore neighborhood.
The transition rules are deterministic, and depends

on the majority state on the investors' trust network,
and on the behavioral profile of the investor.
_________________________________________________________________________________________
Original reference of the model:
Yi-ming Wei, Shang-jun Ying, Ying Fan, Bing-Hong Wang, The cellular automaton model of investment
behavior inthe stock market, Physica A 325 (2003) 507 – 51.
The Model: a hybrid Cellular Automata.
Three behavioral profiles are considered: Imitation, Anti-imitation

and Indifferent.
Imitators follows the majority option on the trust network; Anti-

imitators follows the minority option, and Indifferent choose an
option randomly.
At each time step, the system is updated synchronously and the

market index is calculated from the balance between buying and
selling stocks.
For sake of simplicity, only a single company is considered, and

the agents can negotiate stocks only with the stock bureau office.
Initially, all agents starts with 100 stocks and 10000 money
unities. The stock market index begins at 100 points level.
_________________________________________________________________________________________
Modified model:
ATMAN, A. P. F. ; Gonçalves, Bruna Amin . Influence of the Investor s Behavior on the Complexity of the Stock Market.
Brazilian Journal of Physics (Impresso), v. 42, p. 137-145, 2012.
Results: regular networks
Dependence on initial conditions:
Stationary properties in different scenarios:
Case 1: 100% imitators;

Case 3: 100% indifferent:
Case 4: mixed scenario
33% imitators
33% anti-imitators
33% indifferent.
Evolution of the state of the agents:
Case a: 10% imitators; 1% anti-imitators

Case c: 40% imitators: 4% anti-imitators
Case d: 50% imitators 5% anti-imitators
In all cases the rest of investors are

indifferent.
Hurst exponents for the index temporal series
Case a: 100% indifferent

Case c: 30% imitators: 30% anti-imitators
Case d: 50% imitators 50% anti-imitators
In case c 40% are indifferent.
ATMAN, A. P. F. ; Gonçalves, Bruna Amin . Influence of the Investor s Behavior on the Complexity of the Stock Market.
Brazilian Journal of Physics (Impresso), v. 42, p. 137-145, 2012.
Introducing Complex networks...
In order to quantify the effect of the network morphology on the market index
features, we test four kinds of networks with increasing complexity:
Regular – Moore neighborhood → 8 links to each node;

Conservative Random – 4 out of 8 links of each node are randomly moved;
Random – each node can have 1 to N links randomly distributed.
SWN – networks build using the Barabàsi-Albert algorith – rich becomes richer!
Conservative Small World

Random
random
Complex networks
Results: complex networks
Index temporal series: Mixed case with SWN
Index temporal series: 100% Indifferent case
Index temporal series: 100% Imitators case
Index temporal series: 100% Anti-imitators case
Index temporal series: effect of the limitation of
resources and Hurst exponent methodology
Morphology matters!!
Hurst exponent – Detrended Fluctuation Analysis
Index temporal series: Mixed case
Index temporal series: Low density case – N links (instead of 8N)
Conclusions:
✔
A behavioral cellular automata model can reproduce the main complex
features observed in the real market indexes;
✔
Each behavioral profile studied impacts the index fluctuations in a particular
way;
✔
The morphology of the trust network MATTERS!!
✔
Trust network morphology can alter drastically the dynamic of the model in
some scenarios.
✔
The stock index oscillations have displayed unexpected results when SMW
were used, compared to the regular and random cases.
✔
Driving forces can change their effect depending on the trust network
morphology!
and Perspectives??
Perspectives: complex networks
Morphology matters on richness distribution!
F. Stefan presentation (Monday)
Perspectives: richness distribution
F. M. Stefan presentation (Monday)
Order Book implementation!
Acknowledgements and
References
F. M. Stefan; A. P. F. Atman. Is there any connection between the

network morphology and the fluctuations of the stock market index?
Physica A, v.419, pp. 630-641 (2015).
Thank you for attention and
comments!!
atman@dppg.cefetmg.br
Welcome to Econophysics'16 at
São Paulo, Brazil!!!

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Is there any connection between the network morphology and the fluctuations of

the stock market index?

F.M. Stefan, A.P.F. Atman

Allbens ATMAN Picardi Faria

Dependence of the index fluctuations with the trust network morphology

But, is the financial market predictable?

Can we model the market as a complex system?

Methodology Numerical tools Empirical data

Fractais e AC´s, Semana de C&T Cefet MG, 02 de ou

non-linear way, forming peculiar networks which exhibits emerging

The hability of these systems to display unexpected macroscopic

Quotes of GBP/USD in different scales

2 hours quotes Weekly quotes Monthly quotes

* Slide modified from:

… with a such wide range of possibilities, a crucial

in the last years, SM have experienced a small revolution due to

Competition among memes in a world with limited attention, L. Weng, A. Flammini, A.

The CA is defined on a regular lattice in two dimensions, with

Each site corresponds to an agent (investor) which can be in three

The trust network of each investor is defined as its neighborhood.

The transition rules are deterministic, and depends

Three behavioral profiles are considered: Imitation, Anti-imitation

Imitators follows the majority option on the trust network; Anti-

At each time step, the system is updated synchronously and the

For sake of simplicity, only a single company is considered, and

Case 1: 100% imitators;

Case a: 10% imitators; 1% anti-imitators

In all cases the rest of investors are

Case a: 100% indifferent

In case c 40% are indifferent.

Regular – Moore neighborhood → 8 links to each node;

Conservative Small World

F. M. Stefan; A. P. F. Atman. Is there any connection between the

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