Regensburg 2002 – scientific programme

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AKSOE: Physik sozio-ökonomischer Systeme

AKSOE 10: Finanzm
ärkte und Risikomanagement I

AKSOE 10.5: Talk

Monday, March 11, 2002, 11:30–12:00, H8

Risk reduction and the random magnet problem — •Bernd Rosenow¹, Parameswaran Gopikrishnan², Vasiliki Plerou², and H. Eugene Stanley² — ¹Institut für Theoretische Physik, Universität zu Köln, 50937 Köln, Germany — ²Center for Polymer Studies and Department of Physics, Boston University, Boston, MA 02215, USA

Diversification of an investment into independently fluctuating assets reduces its risk. In reality, movement of assets are mutually correlated and therefore knowledge of cross-correlations among asset price movements are of great importance. Our results support the possibility that the problem of finding an investment in stock which exposes invested funds to a minimum level of risk is analogous to the problem of finding the magnetization of a random magnet. Using methods of random matrix theory to estimate the coupling strengths for this “random magnet problem” from the empirically measured correlations, we find that the interactions are predominantly ferromagnetic with a long range part and several cluster components [1]. In the investment problem, the expected returns of companies add the complication of local random fields to the physics of ferromagnetic clusters [2].
[1] P. Gopikrishnan, B. Rosenow, V. Plerouo, and H.E. Stanley, Phys. Rev. E 64, 035106R (2001).
[2] B. Rosenow, V. Plerou, P. Gopikrishnan, and H.E. Stanley, cond-mat/0111537.