Correlations, risk and crisis: From physiology to finance
Abstract
We study the dynamics of correlation and variance in systems under the load of environmental factors. A universal effect in ensembles of similar systems under the load of similar factors is described: in crisis, typically, even before obvious symptoms of crisis appear, correlation increases, and, at the same time, variance (and volatility) increases too. This effect is supported by many experiments and observations of groups of humans, mice, trees, grassy plants, and on financial time series. A general approach to the explanation of the effect through dynamics of individual adaptation of similar noninteractive individuals to a similar system of external factors is developed. Qualitatively, this approach follows Selye’s idea about adaptation energy.
 Publication:

Physica A Statistical Mechanics and its Applications
 Pub Date:
 August 2010
 DOI:
 10.1016/j.physa.2010.03.035
 arXiv:
 arXiv:0905.0129
 Bibcode:
 2010PhyA..389.3193G
 Keywords:

 Physics  Biological Physics;
 Physics  Physics and Society;
 Quantitative Finance  General Finance
 EPrint:
 42 pages, 15 figures, misprints corrections, a proof is added, improved journal version