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Financial heat machine

Andrei Khrennikov

posted on 19 September 2009

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We consider dynamics of financial markets as dynamics of expectations and discuss such a dynamics from the point of view of phenomenological thermodynamics. We describe a financial Carnot cycle and the financial analogue of a heat machine. We see, that while in physics a perpetuum mobile is absolutely impossible, in economics such mobile may exist under some conditions. Our thermodynamical model for the financial market induces a rather unusual interpretation of the role of financial crises. In contrast to the common point of view, in our model financial crises play a crucial role in functioning of the modern financial market. This is an important (concluding) stage of any financial cycle that is analogous to the stage of cooling in the ordinary Carnot cycle. A financial cycle could not be completed without such a stage as well as the ordinary Carnot cycle. Thus, in spite its destructive (at the first sight) consequences the stage or financial crises is as well important as the stage of "boiling of the financial market" ("heating of expectations")

Discussion

Of course, the model presented in this paper is well known to "designers of financial cycles", but its presentation by analogy with Carnot cycle makes it really evident.
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