Thresholds and Contagions, Particle Physics to Zoology to Finance - A Cross Pollination of Ideas

It is not news that news moves financial markets. This blog will publish research on how, when, why, and which news moves what financial markets.

In the Michaelmas 2006 (Volume 19 No. 1) issue of Oxford Today there was a report that Oxford zoologists were using a particle model from physics to explain why locusts swarm. “As locusts gather, individuals move around randomly – but only up to a point. Once there are more than 70 locusts per square meter, they spontaneously align themselves and all march together, devastating crops in their path”.

“Dr Jerome Buhl and his colleagues, reporting in the journal Science¹, believe the mathematical rules will apply to a wide range of group animals, from fish to moose, and perhaps even to human crowds.”

The threshold effect is something I have wanted to test for the announcement effect. Once a financial market moves by a certain threshold amount then all of a sudden everyone moves together, producing a swarm effect. Traders often will set threshold for action and in aggregate this might explain why some announcements are a “scratch” from a trader’s perspective, that is there is a move but not enough to act upon. Once the threshold is breached though, lots of people want in.

The move from disorder to order or the contagion effect has been used to explain financial crises. Perhaps it can also be used to explain markets reactions to news too. Stay tuned for the result …

¹Buhl, J., Sumpter, D.J., Couzin, I.D., Hale, J., Despland, E, Miller, E & Simpson, S.J. (2006) From disorder to order in marching locusts. Science, 312, 1402.