Israeli-German Team Uses Physics of Finance to Predict Global Crises
If we could have predicted the recent economic downturn, we would have stopped it. Thanks to research by a team of Israeli and German academics, maybe next time we will.
PhD student at Tel Aviv University’s School of Physics and Astronomy, Dror Kenett, has been working with Tel Aviv University physics researcher Professor Eshel Ben-Jacob, chief economist of the Israel Securities Authority Dr. Gitit Gur-Gershgoren, and Matthias Raddent and Professor Thomas Lux from the Kiel Institute in Germany to understand global finance as a ‘complex system’ where everything is intricately interconnected, creating a sequence of causes and effects which can be predicted if studied properly. Other complex systems understood in this way include weather patterns, the human body, and ant colonies.
Kennet explains, “Based strongly on physics theory, this is the intersection between physics, economics and finance. Over the past 20 years, there have been ever-growing amounts of data for economics and finance, and we make use of physics tools, concepts and algorithms, and empirical data approaches to look at what’s really going on.”
The researchers studied six of the world’s largest economies – United States, United Kingdom, China, India, Germany, and Japan – from 2000 to 2010 and mapped correlations between stock trends of the different countries. Except for China, which appears to work independently from the others, they found very strong patterns of interdependence between these markets. Looking back, some obvious patterns emerged, such as the relationship between the US and UK markets. However, the researchers were surprised to find that Japan exhibited different patterns than the others, with alternating ties between Western and Eastern countries.
This research could become an integral part of global economics, providing a pathway towards rebuilding the current economy as well as predicting and preventing future crises.
PhD student at Tel Aviv University’s School of Physics and Astronomy, Dror Kenett, has been working with Tel Aviv University physics researcher Professor Eshel Ben-Jacob, chief economist of the Israel Securities Authority Dr. Gitit Gur-Gershgoren, and Matthias Raddent and Professor Thomas Lux from the Kiel Institute in Germany to understand global finance as a ‘complex system’ where everything is intricately interconnected, creating a sequence of causes and effects which can be predicted if studied properly. Other complex systems understood in this way include weather patterns, the human body, and ant colonies.
Kennet explains, “Based strongly on physics theory, this is the intersection between physics, economics and finance. Over the past 20 years, there have been ever-growing amounts of data for economics and finance, and we make use of physics tools, concepts and algorithms, and empirical data approaches to look at what’s really going on.”
The researchers studied six of the world’s largest economies – United States, United Kingdom, China, India, Germany, and Japan – from 2000 to 2010 and mapped correlations between stock trends of the different countries. Except for China, which appears to work independently from the others, they found very strong patterns of interdependence between these markets. Looking back, some obvious patterns emerged, such as the relationship between the US and UK markets. However, the researchers were surprised to find that Japan exhibited different patterns than the others, with alternating ties between Western and Eastern countries.
This research could become an integral part of global economics, providing a pathway towards rebuilding the current economy as well as predicting and preventing future crises.