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Financial black swans driven by ultrafast machine ecology

Preprint, 2012


Status: Published

Citations:

Cite: [bibtex]


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Abstract: Society's drive toward ever faster socio-technical systems, means that there is an urgent need to understand the threat from'black swan'extreme events that might emerge. On 6 May 2010, it took just five minutes for a spontaneous mix of human and machine interactions in the global trading cyberspace to generate an unprecedented system-wide Flash Crash. However, little is known about what lies ahead in the crucial sub-second regime where humans become unable to respond or intervene sufficiently quickly. Here we analyze a set of 18,520 ultrafast black swan events that we have uncovered in stock-price movements between 2006 and 2011. We provide empirical evidence for, and an accompanying theory of, an abrupt system-wide transition from a mixed human-machine phase to a new all-machine phase characterized by frequent black swan events with ultrafast durations (< 650ms for crashes,< 950ms for spikes). Our theory quantifies the systemic fluctuations in these two distinct phases in terms of the diversity of the system's internal ecology and the amount of global information being processed. Our finding that the ten most susceptible entities are major international banks, hints at a hidden relationship between these ultrafast'fractures' and the slow'breaking'of the global financial system post-2006. More generally, our work provides tools to help predict and mitigate the systemic risk developing in any complex socio-technical system that attempts to operate at, or beyond, the limits of human response times.



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Joshua Bongard - Department of Computer Science, Associate Professor

Bongard's work focuses on understanding the general nature of cognition, regardless of whether it is found in humans, animals or robots. This unique approach focuses on the role that morphology and evolution plays in cognition. Addressing these questions has taken him into the fields of biology, psychology, engineering and computer science.


  • Stacks Image 525371
    Josh Bongard, Victor Zykov, Hod Lipson. Resilient Machines Through
    Continuous Self-Modeling.
    Science 314, 1118 (2006). [Journal Page]
  • Stacks Image 525379
    Joey Anetsberger and Josh Bongard. Robots can ground crowd-proposed symbols by forming theories of group mind. Proceedings of the Artificial Life Conference 2016. [Link to Proceedings]
  • Stacks Image 525375
    Sam Kriegman, Nick Cheney, and Josh Bongard. How morphological development can guide evolution. arXiv 2017. [arXiv]


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Chris Danforth -Department of Mathematics and Statistics, Flint Professor of Mathematical, Natural, and Technical Sciences

Danforth is an applied mathematician interested in modeling a variety of physical, biological, and social phenomenon. He has applied principles of chaos theory to improve weather forecasts as a member of the Mathematics and Climate Research Network, and developed a real-time remote sensor of global happiness using messages from Twitter: the Hedonometer. Danforth co-runs the Computational Story Lab with Peter Dodds, and helps run UVM's reading group on complexity.

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    Peter Sheridan Dodds , Kameron Decker Harris, Isabel M. Kloumann, Catherine A. Bliss, Christopher M. Danforth. Temporal Patterns of Happiness and Information in a Global Social Network: Hedonometrics and Twitter. PLoS ONE 2011. [Journal Page].
  • Stacks Image 525314
    Lewis Mitchell , Morgan R. Frank, Kameron Decker Harris, Peter Sheridan Dodds, Christopher M. Danforth. The Geography of Happiness: Connecting Twitter Sentiment and Expression, Demographics, and Objective Characteristics of Place. PLoS ONE 2013. [Journal Page].
  • Stacks Image 525310
    Andrew G Reece and Christopher M Danforth. Instagram photos reveal predictive markers of depression. EPJ Data Science 2017. [Journal Page].


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Laurent Hébert-Dufresne - Assistant Professor, Computer Science

Laurent studies the interaction of structure and dynamics. His research involves network theory, statistical physics and nonlinear dynamics along with their applications in epidemiology, ecology, biology, and sociology. Recent projects include comparing complex networks of different nature, the coevolution of human behavior and infectious diseases, understanding the role of forest shape in determining stability of tropical forests, as well as the impact of echo chambers in political discussions.

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    Laurent Hébert‐Dufresne Adam F. A. Pellegrini Uttam Bhat Sidney Redner Stephen W. Pacala Andrew M. Berdahl. Edge fires drive the shape and stability of tropical forests. Ecology Letters 2018. [Journal Page]
  • Stacks Image 525335
    Samuel V. Scarpino, Antoine Allard, Laurent Hébert-Dufresne. The effect of a prudent adaptive behaviour on disease transmission. Nature Physics 2016. [Journal Page]
  • Stacks Image 525339
    Laurent Hébert-Dufresne, Joshua A. Grochow, Antoine Allard. Multi-scale structure and topological anomaly detection via a new network statistic: The onion decomposition. Nature Scientific Reports 2016. [Journal Page]


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Paul Hines - School of Engineering, Associate Professor

Hines' work broadly focuses on finding ways to make electric energy more reliable, more affordable, with less environmental impact. Particular topics of interest include understanding the mechanisms by which small problems in the power grid become large blackouts, identifying and mitigating the stresses caused by large amounts of electric vehicle charging, and quantifying the impact of high penetrations of wind/solar on electricity systems.

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    Paul D. H. Hines, Ian Dobson, Pooya Rezaei. Cascading Power Outages Propagate Locally in an Influence Graph That is Not the Actual Grid Topology. IEEE Transactions on Power Systems ( Volume: 32, Issue: 2, March 2017 ). [Journal Page]
  • Stacks Image 525354
    Mert Korkali, Jason G. Veneman, Brian F. Tivnan, James P. Bagrow & Paul D. H. Hines. Reducing Cascading Failure Risk by Increasing Infrastructure Network Interdependence. Scientific Reports volume 7, Article number: 44499 (2017. [Journal Page]
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    Pooya Rezaei, Paul D. H. Hines, Margaret J. Eppstein. Estimating Cascading Failure Risk With Random Chemistry. IEEE Transactions on Power Systems ( Volume: 30, Issue: 5, Sept. 2015 ). [Journal Page]


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James Bagrow - Assistant Professor, Department of Mathematics and Statistics

Bagrow's interests include: Complex Networks (community detection, social modeling and human dynamics, statistical phenomena, graph similarity and isomorphism), Statistical Physics (non-equilibrium methods, phase transitions, percolation, interacting particle systems, spin glasses), and Optimization(glassy techniques such as simulated/quantum annealing, (non-gradient) minimization of noisy objective functions).

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    Y.-Y. Ahn, J. P. Bagrow and S. Lehmann. Link communities reveal multiscale complexity in networks. Nature, 466: 761-764 (2010). [Journal Page].
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    M. R. Frank, J. R. Williams, L. Mitchell, J. P. Bagrow, P. S. Dodds, C. M. Danforth. Constructing a taxonomy of fine-grained human movement and activity motifs through social media. In preparation. (2015). [Journal Page].
  • Stacks Image 525398
    J. P. Bagrow and L. Mitchell. The quoter model: a paradigmatic model of the social flow of written information. To appear, Chaos (2018). [Journal Page].