title: "Price-quakes" shaking the world's stock exchanges.
abstract: BACKGROUND
  Systemic risk has received much more awareness after the excessive risk taking by major financial instituations pushed the world's financial system into what many considered a state of near systemic failure in 2008. The IMF for example in its yearly 2009 Global Financial Stability Report acknowledged the lack of proper tools and research on the topic. Understanding how disruptions can propagate across financial markets is therefore of utmost importance.
  
  
  RESULTS
  Here, we use empirical data to show that the world's markets have a non-linear threshold response to events, consistent with the hypothesis that traders exhibit change blindness. Change blindness is the tendency of humans to ignore small changes and to react disproportionately to large events. As we show, this may be responsible for generating cascading events--pricequakes--in the world's markets. We propose a network model of the world's stock exchanges that predicts how an individual stock exchange should be priced in terms of the performance of the global market of exchanges, but with change blindness included in the pricing. The model has a direct correspondence to models of earth tectonic plate movements developed in physics to describe the slip-stick movement of blocks linked via spring forces.
  
  
  CONCLUSIONS
  We have shown how the price dynamics of the world's stock exchanges follows a dynamics of build-up and release of stress, similar to earthquakes. The nonlinear response allows us to classify price movements of a given stock index as either being generated internally, due to specific economic news for the country in question, or externally, by the ensemble of the world's stock exchanges reacting together like a complex system. The model may provide new insight into the origins and thereby also prevent systemic risks in the global financial network.
authors.affiliation: CNRS, Institut Non Linéaire de Nice, Sophia Antipolis, Valbonne, France. vitting@unice.fr
authors.forename: Jørgen Vitting
authors.initials: JV
authors.lastname: Andersen
authors.forename: Andrzej
authors.initials: A
authors.lastname: Nowak
authors.forename: Giulia
authors.initials: G
authors.lastname: Rotundo
authors.forename: Lael
authors.initials: L
authors.lastname: Parrott
authors.forename: Sebastian
authors.initials: S
authors.lastname: Martinez
mesh_terms: D038622:Internationality; D007449:Investments
references.citation: Conscious Cogn. 2002 Mar;11(1):78-97
references.pmid: 11883989
references.citation: PLoS One. 2010 Dec 20;5(12):e15032
references.pmid: 21188140
references.citation: Percept Psychophys. 1988 Oct;44(4):369-78
references.pmid: 3226885
references.citation: PLoS One. 2011 Apr 27;6(4):e19378
references.pmid: 21556323
references.citation: Phys Rev Lett. 1992 Feb 24;68(8):1244-1247
references.pmid: 10046116
references.citation: Nature. 1999 Mar 4;398(6722):34
references.pmid: 10078528
references.citation: Annu Rev Psychol. 2002;53:245-77
references.pmid: 11752486
references.citation: Phys Rev E Stat Nonlin Soft Matter Phys. 2003 Oct;68(4 Pt 2):046130
references.pmid: 14683025