Early warning of market bubbles

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Netzwerk des S&P 500 während der US-Immobilienblase von 2006 bis 2007. Währe

Netzwerk des S&P 500 während der US-Immobilienblase von 2006 bis 2007. Während traditionelle Marktindikatoren wie logarithmische Renditen (in blau) relativ geringe Schwankungen aufweisen, identifiziert das Minimum der Netzwerkkrümmung (in orange) eindeutig die Blase im Juni/Juli 2006. © A. Samal | Institute of Mathematical Sciences (IMSc)

Mathematical metrics reveal market instabilities

An international team of interdisciplinary researchers has identified mathematical metrics to characterize the fragility of financial markets. Their work sheds light on the higher-order architecture of financial systems and allows analysts to identify systemic risks like market bubbles or crashes.

Max Planck Institute for Mathematics in the Sciences director Jürgen Jost summarizes the struggle of analyzing market fragility: "there are no easy definitions of a market crash or bubble and merely monitoring established market indices or log-returns does not suffice, but our methodology offers a powerful tool for continuously scanning market risk and thus the health of the financial system". The insights gained by this study can help decision-makers to better understand systemic risk and identify tipping points, which can potentially forecast coming financial crises or possibly even avoid them altogether.

Royal Society Open Science is a peer-reviewed open access scientific journal published by the Royal Society since 2014. It focuses on publishing high-quality original research across the entire range of science and mathematics.

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