Researchers from Tel Aviv University, in collaboration with the Kiel Institute of World Economy in Germany, have developed a market “seismograph” – a new methodology that measures the interconnections between stock markets across the globe. The system has the potential to serve as an early warning system and provide measures to manage and mitigate the spread of financial crisis.
Recently published in the journal PLOS ONE, the research investigates connections among individual major world markets by analyzing the simultaneous behavior of the stock market as a global whole.
“It has become both vital and critical to understand the relationships and dependencies among the world’s markets,” says Tel Aviv Ph.D. student Dror Kenett, suggesting that each country could use this method as a tool for analyzing the extent of its connection to particular foreign markets and identifying where they are at risk – prompting protective financial measures.
The researchers say their new method of understanding market connections could help each country predict when a financial crisis is imminent, allowing it to set up policies that will protect their own markets from becoming dangerously intertwined with struggling markets.
“In the current era, when the global financial village is highly prone to systematic collapses, our approach can provide a sensitive ‘financial seismograph’ to detect early signs of global crisis,” says Prof. Eshel Ben-Jacob of TAU’s School of Physics and Astronomy.
Sums up Kenett: “With such high frequency data, you can have almost real-time or short-time predictions on how economic information flows throughout the world.”