SOG signatures of financial market crashes.

• Main Author: Teh, Boon Kin.
• Other Authors: Cheong Siew Ann
• Format: Final Year Project
• Language: English
• Published: 2013
• Subjects: DRNTU::Science
• Online Access: http://hdl.handle.net/10356/52712
• Institution: Nanyang Technological University

In this project, we are interested in studying the dynamics of the financial downturn. The focus of our project will be their precursors and for that, we will be studying the financial downturn of Singapore Stock Exchange in 2008 which is due to the subprime crisis in the United States. We had found several precursors for financial downturns, and suspect those precursors are governed by the changes of traders’ behaviors. We found four significant precursors to financial crisis in SGX, the phase transition in tick price differences and increasing number of trades, the growth of cross correlation among stocks, decrease in power law exponents and decrease in the spread of the power law exponents. All these precursors are strongly correlated to the change of traders’ behaviors, and we deduce that the coherence among traders increased when financial crisis approaches. Since there is increasing correlation among the traders approaching the crisis, we propose that the dynamics of traders follows the Soup of Group (SOG) model. However, the fit of empirical data with SOG model shown that the traders’ dynamics only follow SOG model partially. Furthermore, by exploiting the SOG model and the precursors, we were able to forecast the time of the financial downturn. However, this is only to half a year accuracy. With this, we will highlight the limitations of using the SOG model and proposing future works that can be done.