Tipping points and crises in financial markets

Abstract

Electricity spot markets and other financial markets are complex systems, and it is difficult to forecast their behaviour, especially uncontrolled and unmanageable situations, such as power crises and deflation of financial bubbles.

An energy crisis is any price rise in the supply of energy resources to an economy. It has undesirable consequences, occasionally irreversible. The most known of these crises is the California Electricity Crisis, when wholesale prices have risen by over 800%.

The goal of the thesis is to explore sudden transitions in electricity spot markets and other financial markets within the framework of nonlinear dynamical systems. There are different types of such transitions, which we can trace using observable signatures.

Using the theory of "critical slowing down", we demonstrate that there were clear early warning signatures prior to the California Electricity Crises and other financial crises. The results are promising and show that further research should be made in this direction.