Financial Markets and second-order Phase Transitions

Description

In this project, we will examine an analogy between financial markets and second-order phase transitions in physical systems. The empirical basis are observations that the author has made in the past decade. They indicate that financial markets can be modelled by scalar quantum mechanical variables (fields) in a ϕ^4 potential.A scalar field theory with ϕ^4 potential also describes the second-order phase transition of the Ising model, and of other physical systems that lie in the same universality class, such as water and steam. An intuitive explanation for this analogy is that buy- and sell-orders may be viewed as Ising-like spins on a random lattice which represents the social network of traders. In this project, we further work out the previously made observations of the author, publish them, and establish the conjectured analogy with second-order phase transitions. If we succeed in modelling markets in analogy with second-order phase transitions, this would open up a new chapter in the theory of financial markets, and introduce completely new methods from statistical physics into Finance.