Scaling and Memory

in Stock Market and Currency Variations:

Similarities to Earthquakes

Shlomo Havlin
Bar-Ilan, Israel

in collaboration with

Kazuko Yamasaki
Tokyo, Japan

Valerie Livina, Sergey Tuzov, Lev Muchnik
Bar-Ilan, Israel

Armin Bunde
Giessen, Germany

H. Eugene Stanley
Boston, USA
Challenges:
(a) Are there scaling laws in return intervals?
(b) Is there memory in the records of return
intervals?
(c) Are there similarities between economy and
earthquakes?
(d) How can we improve forecast of extreme events?
) 1 (
) 1 ( ) (

t R
t R t R
Return intervals
Stock market data Currency series
Earthquakes
Normalized absolute return

Scaling in Zipf plots

Stock market Currency Earthquakes

Length return
interval for a given
threshold q

Ranking in
decreasing length
Scaling function
rank x
R x f R x
q q

= ) ( ) ( t
Scaling in distributions
probability
distribution to have
a return interval
for a given q
) (t
q
P
t
Stock market Currency Earthquakes
Scaling function
|
|
.
|

\
|
=
q q
R
f
R
P
t
t
1
) (
IBM
Yen-Dollar
Japan
Memory in the records
Conditional probability
for having a return interval
after

for
) | (
0
t t
q
P
t
0
t
4 / 3 0
4 / 1 0
t t
t t
>
<
Memory in the distributions
Stock market Currency
Earthquakes
Clustering of extreme events
Scaling function
|
|
.
|

\
|
=

q q
R
f
R
P
t
t t
1
) | (
0
Memory in the averages
Stock market Currency
Earthquakes
mean conditional
return interval
) (

0
t t
Summary
Scaling of return intervals
Well approximated by single scaled function.
Strong effect of memory







Origin: long-term correlations in the volatilities.
Strong similarity in both scaling (for different q) and
memory to earthquakes.
Application: improving risk assessment.
q q q
R R f P / ) / ( ) ( t t =

> <
< >
<
q q q
q q q
q
R f or P P
R f or P P
R
t t t t
t t t t
t
) ( ) | (
) ( ) | (
0
0
0

> >
< <
>
q q q
q q q
q
R f or P P
R f or P P
R
t t t t
t t t t
t
) ( ) | (
) ( ) | (
0
0
0
V. Livina, S. Tuzov, S. Havlin, A.Bunde, Recurrence
intervals between earthquakes strongly depend on
history, preprint physics/0410274 (Physica A, in press).


A. Bunde, J. Eichner, J. Kantelhardt, S. Havlin, Long-
term memory: natural mechanism for the clustering of
extreme events and anomalous residual times in climate
Records (PRL, to appear).

K. Yamasaki, S. Havlin, A. Bunde, H. E. Stanley, Scaling
and memory in volatility return intervals in stock markets
(to appear)
Bibliography