Physics Seminar

Dynamic Systems in Finance
by Dr. O. H Criner, Texas Southern University
2008-04-16, 10:00 AM in NSB 148

Abstract

 

The research program that views economies as complex dynamic systems has received significant development over the past several decades and has become known as “Complexity Economics.” The amount of information that economies create has grown exponentially. Markets have become electronic; and they are consolidating into new structures. The data of economic activity worldwide are widely available. However, the theory and methods of analysis and interpretation of these data have not kept pace with the economic development.

Hundreds of economic parameters are provided regularly to markets worldwide. Everyday, economic reports are produced by governmental and nongovernmental agencies. Corporations make their earnings reports and other information available. This flood of information is used by pundits and commentators in the media continuously. The media’s re-statement of the facts combined with its reporting of current events (weather, war, political and social activity, etc.) constitutes a well-acknowledged, external influence on investment and trading activity. However, the nature of this influence is subject to wide interpretation. 

The research reported here seeks to quantify this influence on several major, globally-traded, financial instruments. The methodology applies data analysis techniques analogous to those used for prediction and control of complex dynamic systems. The methodology links the response of trading activity to reports of economic activity. The important issues are (1) identification of the reports that have significant effect on trading activities, (2) identification of the affected markets, and (3) determination of the extent, magnitude, and duration of the influence.

We develop a computational dynamic systems model from the derivatives of the market prices and we use the external economic data as driving functions on the dynamic system. We explore a system consisting of the derivatives markets in crude oil, metals, stock indices, currencies, and interest rates over ten years.