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# Self-referential behaviour, overreaction and conventions in financial markets

## I Introduction

### A Aim of the paper

Efficient Market Theory claims that prices contain all available information at a given instant of time (for more precise statements, see ). The argument invoked to support this claim is arbitrage: if prices differed from their informationally efficient value, an arbitrageur possessing some information not reflected in the price would be able to make a profit, and doing so would bring the price closer to its true value. In this framework, price changes can only be triggered by some new, unpredictable piece of information. Therefore, as shown by Samuelson , properly anticipated prices fluctuate randomly, i.e. prices should follow a random walk. This theory relies on the assumption that all agents are rational and are all seeking to discover the ‘true’, fundamental value of a stock.

However, this assumption is extremely strong and has been criticized by many authors (see, e.g. ). It seems clear that many agents in fact do not behave like this. One reason is that the number of objective factors that can affect the value of a stock is very large, and that interpretation to be given to some ‘information’ is often totally ambiguous. Therefore, as emphasized by Keynes and more recently Orléan , market participants are more interested to guess the opinion of the market than to discover the fundamental value of the stock. As illustrated by Keynes’ famous beauty contest , the goal is to correctly anticipate what other participants do anticipate; this self-referential behaviour can lead to markets that differ strongly from the predictions of Efficient Market Theory. An interesting example is provided by a simple game that encapsulates the basic message of Keynes’ beauty concept. In this game, participants must each choose a number between $`0`$ and $`100`$, and the winner(s) are those whose choice is closest to one-half of the average choice . Of course, the fully rational choice is that all players choose $`0`$. On the other hand, if agents are all totally irrational, the optimal choice is $`25=50/2`$, but if a fraction $`f_1`$ follows this first level reasoning, the optimal choice becomes $`[25f_1+50(1f_1)]/2`$, etc. Empirical studies show that the average is close to $`25`$, and that $`30\%`$ of the players predict a number close to $`12.5`$. In the context of repeated games (such as financial markets), a natural strategy is to study empirically the statistical behaviour of the other agents and to play accordingly. (Agents doing this will be called ‘strategic’ in the following). A common temptation is to compare the present situation with similar situations from the past, and make the guess that what already happened is more likely to happen again. As Brian Arthur puts it: As the situation is replayed regularly, we look for patterns, and we use these to construct temporary expectational models or hypotheses to work with . For example, price tend to decline before a war is declared, and to rise again once the war has actually started (as recent events again sadly confirm). Often, some plausible story is given to understand why such a pattern should exist. This convinces more participants that the effect is real and their resulting behaviour is such to reinforce (or even to create) the effect: this is a self-fulfilling prophecy. A large consensus among economic agents about the correlations between a piece of information and the market reaction can be enough to establish these correlations. Such a ‘condensation’ of opinions leads to what Keynes and Orléan called a convention , a common lore on which uncertain agents can rely on, and that supplements gossamer information. A convention may concern the overall mood of the market (bullish or bearish, for example), but may also concern the way a piece of information is interpreted by the market. We will primarily focus on this second type of convention. The information we will consider can either exogenous to the market (such as the interest rate, inflation and other macro-economic figures, or geopolitical issues), or endogenous to the market, such as price patterns that feedback on the price itself (trends leading to bubbles, or ARCH-like volatility feedback, etc.)

A striking feature is that not only these conventions spontaneously appear, but can also disappear or even invert the purported correlation. For example, as we document in Section V below (see in particular Fig. 5), the correlation between bond markets and stock markets was positive in the past (because low long term interest rates should favor stocks), but has recently quite suddenly become negative as a new ‘Flight To Quality’ convention set in: selling risky stocks and buying safe bonds has recently been the dominant pattern.

The aim of the present paper is to analyse a parsimonious model for the appearance and dynamics of conventions, and their consequence on the statistics of price changes. As is now well known, price returns exhibit several statistical features that cannot be related to the fluctuations of any fundamental value, as should be if markets were efficient . One of the biggest puzzle of the efficient market theory is the so-called ‘excess volatility’: Schiller showed in a famous study that the actual volatility of markets is far too large compared to what is expected, within the efficient market theory, from the volatility of dividends . Even accounting for some reasonable uncertainty about the expected value of these dividends leaves the empirical volatility at least a factor $`5`$ too large . Also, the volatility is itself random and fluctuates in time, exhibiting ‘clustering’ and remarkable long-range temporal autocorrelations (long term memory) , analogous to fluctuations in turbulent flows . Other similar effects are worth mentioning, such as the excess cross-correlations, both between domestic stocks and between international markets, that cannot be explained in terms of fundamental, economic correlations .

Our model is an example of a self-fulfilling process: trying to extract correlations between information and price from past observations, market participants tend to create and/or reinforce them. Using the language of physics, the model has a phase transition: above a certain threshold in feedback strength, the market can be in two distinct states, or two conventions. We find that this mechanism naturally leads to some excess volatility and long term memory. In the case where information is endogenous, these two states correspond to trend following or contrarian ‘conventions’, where the autocorrelations are either positive (trend) or negative (contrarian). The market however switches between the two conventions on a certain time scale (that can be very long) such that on average the autocorrelation is zero, although locally the autocorrelation has a well defined sign. These phases correspond to the market folklore: markets are indeed thought by many investors to be alternatively ‘trending’ or ‘mean-reverting’, in strong opposition with the prediction of Efficient Market Theory. Beside anecdotal evidence, we provide in this paper convincing empirical evidence for the existence of these long-lived excess correlations (or anticorrelations) in stock markets (see Section V, Figs 6,7).

### B Relation with other work and organization of the paper

The existence of trends and ‘anti-trends’ has been broadly documented in the economic literature (see e.g.  and refs. therein), where it is described as ‘overreaction’ and ‘underreaction’ to news. In the first case, the overreaction is later on compensated by a mean reversion, whereas underreaction corresponds to an anomalously slow adjustment of the price and the appearance of a trend. A well known study of de Bondt and Thaler , that we will further discuss in the conclusion, shows that over-performing stocks tend to ‘mean-revert’ on the scale of 5 years, and vice-versa. Several ‘behavioral’ models have recently been proposed to understand these effects (see , chapters 5 & 6, and ). We follow here the same goal of articulating a simple and generic model for these pricing anomalies. Although some ingredients are common to these models and ours, there are also major differences, both in the concepts and in their technical implementation. For example, in the ‘investor sentiment’ model of , investors postulate the existence of alternating ‘trending’ and ‘mean-reverting’ phases that they try to identify from observation. In our framework, on the other hand, these phases dynamically appear as agents attempt to learn the statistics of price changes from past observations. This ‘learning’ aspect, much emphasized in  is actually absent from the model presented in . The model of Hong and Stein  postulates that some ‘momentum traders’ use (but only for a limited amount of time) the positive temporal correlations created by the slow diffusion of information among ‘news-watchers’. The effect of these momentum traders is to reinforce the trend and to convert an initial ‘underreaction’ into ‘overreaction’. In order to observe mean reversion effects, another category of ‘contrarian’ traders must be put by hand. In our model, on the other hand, ‘trends’ can appear without any fundamental news. In this respect, it is perhaps useful to mention the work on information cascades , which, although very different in spirit, also describes a situation where a symmetry between two possible outcome can be broken by a small initial bias, amplified by a subsequent self-referential decision process. Finally, several families of models where trading strategies use the price past history have recently been investigated, for example in the schematic inductive rationality models (El Farol bar model  or Minority Games ) or in agent based models where a fraction of agents base their trading decision on the recent behaviour of the price itself . The present model is interesting because the self-referential feedback is much simpler and its consequences can be analytically investigated in full details.

The organization of the paper is as follows. We describe and analyze the model in full generality in Section II, when agents try to use some correlations between the price and a certain information indicator, which can be exogenous or endogenous. We motivate our ‘Langevin’ description of the feedback dynamics and explain how non trivial ‘equilibria’ can appear when the self-referential tendency increases. We discuss the appearance of super-long time scales for regime switching (Section III). We then specialize to the particular case where traders use the past price changes as a source of information (Section IV), and where the above mentioned trend following or contrarian ‘conventions’ (or market sentiments) appear. In some parameter region, trends can be short in time but strong in intensity, which leads to large price jumps, or crashes. We then analyze some empirical data that support the predictions of the model (Section V). Finally, some extensions of the model are proposed, and our findings are contrasted with the predictions of Efficient Market Theory.

## II Set up of the model

We will call $`P_t`$ the (log-)price of a certain asset at time $`t`$, and $`\delta P_t`$ the return between $`t`$ and $`t+1`$. Here, $`\mathrm{\Delta }t=1`$ is the elementary time step over which agents revise their strategies, which might be one day or one week, although in some case smaller time scales (like minutes) could also be usefully considered. We now argue that some agents base their strategy on the observation of the temporal change of a certain ‘index’ $`I_t`$, which might be a financial index or an economic indicator (for example dividends, interest rates, inflation, confidence, unemployment, etc.), or even, as will be considered below, the price $`P_t`$ itself. We will denote as $`\delta I_t`$ the change of this indicator between $`t`$ and $`t+1`$. Note that $`\delta I_t`$ could in fact be a binary variable, representing a qualitative piece of information, and that the interval $`\mathrm{\Delta }t`$ might not be uniform, and be the time interval between the arrival of news.

Suppose that there exists a causal correlation between the change of $`I_t`$ and that of $`P_t`$, in the sense that the correlation between $`\delta I_t`$ and $`\delta P_{t+1}`$:

$$E\left[\delta I_t\delta P_{t+1}\right]C.$$
(1)
(We suppose for simplicity that all correlations for larger time lags are zero). It is then a well known result of linear filtering that the best estimate (in a quadratic sense) of $`\delta P_{t+1}`$ knowing $`\delta I_t`$ is given by (see e.g. , p. 132):

$$\delta P_{t+1}^{}=\frac{C}{E\left[\delta I_t^2\right]}\delta I_t.$$
(2)
Now, we consider two types of agents, those who act randomly, or based on some information uncorrelated with $`I_t`$, and those who try to take advantage of the possible correlations between $`\delta I_t`$ and $`\delta P_{t+1}`$. Since the ‘fundamental’ value of the correlation $`C`$ is in fact not known, agents of the second type attempt to extract this value from past history, from which they try to learn the value of $`C`$. It is natural to assume that these agents give more weight to the recent past. A convenient framework is that of exponential moving averages, such that the estimated value of $`C`$ at time $`t`$ is given by:

$$C_t=\frac{1\alpha }{\alpha }\underset{t^{}=\mathrm{}}{\overset{t1}{}}\alpha ^{tt^{}}\delta I_t^{}\delta P_{t^{}+1},$$
(3)
where $`\alpha `$ sets the memory time $`T`$ of the agents, as $`T=1/|\mathrm{ln}\alpha |`$. Eq. (3) is equivalent to the following Markovian update of the estimated correlation:

$$C_t=\alpha C_{t1}+(1\alpha )\delta I_{t1}\delta P_t.$$
(4)
We now suppose that the agents neglect the possible fluctuations of the volatility of $`I_t`$ and assume $`E\left[\delta I_t^2\right]`$ is a constant (that we set in the following equal to unity, unless stated otherwise). Relaxing this hypothesis would lead to minor changes in the following. The expected return between $`t`$ and $`t+1`$ is therefore $`C_t\delta I_t`$; it is natural to assume that one will buy (or sell) a quantity $`V_t`$ which is an odd function of this expected return:

$$V_t=𝒢\left(C_t\delta I_t\right).$$
(5)
In general one expects the demand function $`𝒢`$ to be linear for small arguments and to saturate for large arguments. In the context of an exponential utility function (called CARA in the literature), the quantity to be maximized is the expected return minus a certain coefficient times the variance of the return. In this case, the function $`𝒢`$ is found to be strictly linear. The saturation comes from both the limited resources of the agents and their limited ability to borrow and from an increased risk aversion for tail events . Both effects tend to limit the invested quantity even if the signal is very strong. These strategic orders add to the non strategic ones and impact the price as:

$$\delta P_{t+1}=\left(\mathrm{\Omega }_t+NV_t\right),$$
(6)
where $`N`$ is the number of ‘strategic’ agents that try exploit this correlation, and $`\mathrm{\Omega }_t`$ the total volume of ‘non strategic’ agents, which we assume to be a random variable of zero mean and variance $`\sigma ^2`$. (In fact, as we will discuss below, these non strategic agents could base their decision on other, uncorrelated information sources). The impact function $``$ describes how a given order volume affects the price, and has been the subject of many recent empirical studies . Provided the elementary time step $`\mathrm{\Delta }t`$ is large enough, this function is linear for small arguments and bends down for larger order imbalance. Here, we will neglect higher order contributions to $``$ and simply posit, as in :

$$(u)=\frac{u}{\lambda },$$
(7)
where $`\lambda `$ is a measure of the liquidity of the asset. Higher order corrections would only change some details of the following discussion. Since $`𝒢`$ is odd, its generic expansion for small arguments reads $`𝒢(u)=aubu^3+\mathrm{}`$ with $`a,b>0`$, with higher order terms that do not change the following qualitative conclusions. We finally obtain the central equation of the present study, valid in the small signal limit:

$$\delta P_{t+1}=\frac{\mathrm{\Omega }_t}{\lambda }+gC_t\delta I_thC_t^3\delta I_t^3+O(C^5),$$
(8)
where $`C_t`$ is self-consistently expressed as (3), and $`gNa/\lambda `$, $`hNb/\lambda `$. These two equations basically describe the self fulfilling process that we study in details now. The parameter $`g`$ will turn out to be crucial in the following; note that $`g`$ increases with the number of strategic agents.

## III analytic results: spontaneous appearance of conventions

### A A Langevin equation

In the absence of strategic agents ($`g=0`$), there are no feedback effects, and the dynamics of the price is a simple random walk of volatility $`\mathrm{\Sigma }_0=\sigma /\lambda `$. The apparent correlation $`C_t`$ will describe any deviation from this trivial behaviour. Using Eqs. (3,8) one finds:

$$C_{t+1}C_t=ϵ\left(C_t+gC_t\delta I_t^2hC_t^3\delta I_t^4+\xi _t\right),$$
(9)
where we have set $`1\alpha =ϵ`$, and $`\xi _t\delta I_t\mathrm{\Omega }_t/\lambda `$ is another white noise (because $`\mathrm{\Omega }_t`$ is supposed to be independent of $`\delta I_t`$), of zero mean and variance $`\sigma ^2/\lambda ^2`$.

Now, we will write:

$$\delta I_t^2=E(\delta I_t^2)+\eta _t=1+\eta _t;\delta I_t^4=E(\delta I_t^4)+\eta _t^{}=(3+\kappa )+\eta _t^{},$$
(10)
where $`\eta _t`$ and $`\eta _t^{}`$ are two correlated noises of zero mean, and $`\kappa `$ the excess kurtosis of the index fluctuations. Therefore the evolution of $`C_t`$ contains a deterministic part and a random part. In the case $`ϵ1`$ considered in this paper, where the memory time $`T1/ϵ`$ becomes much larger than the elementary time step, one can neglect, in a first approximation, the influence of $`\eta _t`$ and $`\eta _t^{}`$ (but see below). Taking the continuous time limit $`ϵ0`$, one can write a Langevin stochastic differential equation for $`\widehat{C}_t=C_t/\mathrm{\Sigma }_0`$ in rescaled time $`ϵt=\widehat{t}`$:

$$d\widehat{C}=\frac{dV}{d\widehat{C}}d\widehat{t}+\sqrt{ϵ}d\xi ,$$
(11)
where $`d\xi `$ is a Brownian noise of unit variance and the ‘potential’ $`V`$ is given by:

$$V(\widehat{C})=\frac{1}{2}(1g)\widehat{C}^2+\frac{1}{4}(3+\kappa )\widehat{h}\widehat{C}^4,$$
(12)
with $`\widehat{h}h\mathrm{\Sigma }_0^2`$. This is the so-called Landau potential that describes phase transitions . For $`g<1`$ this potential has an absolute minimum at $`\widehat{C}=0`$, whereas for $`g>1`$, $`\widehat{C}=0`$ becomes a local maximum and two stable minima appear for $`\widehat{C}=\pm C^{}=\pm \sqrt{(g1)/(3+\kappa )\widehat{h}}`$. Note that retaining more terms in the expansion of $`𝒢`$ would change the detailed shape of $`V(\widehat{C})`$, but not the above crucial qualitative feature. From now on, we will drop the hat on $`\widehat{C}`$.

### B The appearance of stable conventions

From the Langevin equation for $`C`$ one deduces, using standard methods , the equilibrium distribution $`P(C)`$ which is of the Boltzmann-Gibbs form:

$$P(C)=\frac{1}{Z}\mathrm{exp}\left(\frac{2V(C)}{ϵ}\right),$$
(13)
where $`Z`$ is a suitable normalization. Therefore, for $`g<1`$ (weak feedback), $`P(C)`$ is unimodal and has a maximum at $`C=0`$, whereas for $`g>1`$ (strong feedback), the most probable values for $`C`$ are $`\pm C^{}`$. This means that for strong feedback, a non zero correlation between the price and the indicator spontaneously appears. This correlation can be either positive or negative, corresponding to the two possible ‘conventions’. However, on average, the correlation is still zero for $`g>1`$, since $`C`$ randomly flips between $`\pm C^{}`$. In order to do so, a ‘potential barrier’ $`\mathrm{\Delta }V`$ has to be crossed (see Fig. 1); the ‘switching’ time $`\tau `$ is well known to be given, for $`T\mathrm{\Delta }V1`$, by the Arrhenius law :

$$\tau \left(\frac{T}{g1}\right)\mathrm{exp}\left[2T\mathrm{\Delta }V\right],$$
(14)
with $`\mathrm{\Delta }V=(g1)^2/4\widehat{h}(3+\kappa )`$ and $`T=1/ϵ`$. Because of the exponential term, this switching time can be much larger than the memory time $`T`$: one non trivial consequence of a phase transition is to generate time scales that are unrelated to the natural time scale of the problem. The convention can therefore persist for very long times. This is because the random event that would ‘invert’ the signal and nucleate a new convention occurs only exponentially rarely. Note however that the above formula is only correct when the noise $`\xi (t)`$ is Gaussian; non Gaussian events do accelerate the crossing of the barrier . We will see in empirical data that extreme events may indeed be a cause of abrupt convention changes.

When $`g<1`$, the distribution of $`C`$ is a distorted Gaussian around $`C=0`$. Neglecting the non linear term leads to:

$$C_t=ϵ_0^t\text{d}\xi (t^{})\text{e}^{ϵ(g1)(tt^{})},$$
(15)
where we have assumed for simplicity $`C_{t=0}=0`$. Hence the typical value of $`C`$ is $`C\sqrt{ϵ/(1g)}`$ and typical time $`\tau =T/(1g)`$ for the variations of $`C`$, which diverges when $`g`$ gets close to 1. The strategic agents thus amplify the excursions of $`C`$, but the most probable value of $`C`$ is still zero. Strictly speaking, there is no stable point or convention in this case, although when $`g1^{}`$ the excursions are of larger amplitude and of longer duration, which corresponds to what can be coined a ‘floating convention’.<sup>*</sup><sup>*</sup>*We should add here a remark on the rôle of the multiplicative noise term $`gC_t\eta _t`$ neglected in the above analysis. Since $`\mathrm{\Omega }_t`$ and $`\eta _t`$ are uncorrelated, the Langevin noise has a variance now given by $`ϵ[1+(2+\kappa )g^2C^2]`$. Going to the Fokker-Planck equation , one can show that for small $`ϵ`$, the rôle of this extra term is to shift the value of the critical threshold to $`g=1+2(2+\kappa )ϵ`$.

It is interesting to give to the threshold value $`g=1`$ a more intuitive interpretation. Recall that $`g=Na/\lambda `$, where $`N`$ is the number of strategic agents and $`a`$ the coefficient that relates the strength of the (apparent) signal to the investment volume. It is clear that the prediction of the future return must be compared to the volatility of the asset; therefore $`av_0/\mathrm{\Sigma }_0`$, where $`v_0`$ is the average volume of investment for an individual agent. On the other hand, if the number of non strategic agents is $`N_0`$, one expects that the root mean square of $`\mathrm{\Omega }_t`$ should scale like $`\sqrt{N_0}`$. Therefore $`\mathrm{\Sigma }_0\sqrt{N_0}v_0/\lambda `$ (assuming that non strategic agents invest a similar volume $`v_0`$). Finally:

$$g\frac{N}{\sqrt{N_0}},$$
(16)
independently of both $`v_0`$ and $`\lambda `$. The conclusion is that the market enters the ‘convention’ phase as soon as $`N>\sqrt{N_0}`$. Hence 100 correlation-hunting traders are enough the change qualitatively a market of 10000 non strategic agents.

### C Overreaction to news

Suppose now that there indeed exists a small objective correlation between $`\delta P_{t+1}`$ and $`\delta I_t`$, justified by some real economic mechanism relating the two quantities. This means that the ‘noise’ $`\mathrm{\Omega }_{t+1}`$ which governs the price dynamics in the absence of strategic traders and $`\delta I_t`$ have a non zero correlation coefficient:

$$E[\frac{\mathrm{\Omega }_{t+1}}{\lambda }\delta I_t]=\beta E[\delta I_t^2],$$
(17)
where we conform to the common usage of calling this particular correlation coefficient the ‘beta’. The effect of such a term is to add a linear contribution to the effective potential $`V(C)`$ of the Langevin equation, which plays the rôle of a symmetry breaking field in the language of phase transitions :

$$V(C)V(C)\beta C.$$
(18)
For $`g<1`$ and $`\beta `$ small, the most probable value of $`C`$ is $`\beta /(1g)`$ ($`=\beta `$ for $`g=0`$, as it should). Therefore, $`C`$ is of the same order as its ‘true’ cause whenever $`g<1`$. However, in the limit $`g1^{}`$, the apparent correlation that arises becomes much larger than its true cause: the sensitivity of the market to external information is anomalously amplified. For $`g>1`$, the term $`\beta C`$ breaks the symmetry between the two conventions $`\pm C^{}`$. In the limit $`ϵ0`$, the most probable value of $`C`$ is given by $`+C^{}`$ for $`\beta 0^+`$ and by $`C^{}`$ for $`\beta 0^{}`$ (see Eq. 13). Therefore, in the convention phase, the amplitude of the apparent correlation is totally unrelated to that of the true correlations, although the sign of the correlation reflects the underlying economic reality. One observes here a typical example of overreaction to news leading to excess correlations that are well documented in the literature . For example, the correlations between the stocks belonging to an index and the index itself are too strong to be explained by the intrinsic correlations between the stocks . The present period (first quarter of 2003) is a good illustration of this effect: the cross correlations between U.S. stocks is at a historical high; due to the large uncertainty, traders’ hunt for useful information is more acute, and the influence of the index on individual stocks is expected to be anomalously large. In our model, this corresponds to the case where the indicator $`I_t`$ is the stock index, a case detailed in section IV D. Another well known example is the excess correlation (in particular in crisis periods) between emerging country markets belonging to different geographic regions . In order to understand the relation between these effects and the present model, we need to make the following remark: although $`C_t`$ is a correlation between unequal times, the equal time correlation between $`\delta P`$ and $`\delta I`$ measured on a coarser time scale will reflect the value of the lagged correlation $`C`$. In other words, causal correlations on a fine time scale do generate equal time correlations on a coarser time scale. More precisely, one has:

$$C^{(n)}E\left[(P_{t+n}P_t)(I_{t+n}I_t)\right]=E\left[\underset{t^{}=t}{\overset{t+n1}{}}\delta P_t^{}\underset{t^{}=t}{\overset{t+n1}{}}\delta I_t^{}\right]=\underset{t^{}=t+1}{\overset{t+n2}{}}C_t^{}(n1)C_t$$
(19)
where the last equality holds if $`n\mathrm{\Delta }t\tau `$, i.e. when the coarse time increment $`n\mathrm{\Delta }t`$ is small compared to the convention shift time $`\tau `$. Therefore, if strong causal correlations are established intra-day, as is the case between individual stocks and the index, an excess daily correlation between stocks will also appear, see section IV D.

### D Consequences for the price fluctuations: excess volatility

The feedback effect leads to an increase of the volatility of the price, since the instantaneous volatility is given by:

$$\mathrm{\Sigma }_t^2=E[(\delta P_t)^2]=\mathrm{\Sigma }_0^2(1+g^2C_t^2)+O(C^4).$$
(20)
The non trivial dynamics of $`C`$ therefore leads to a volatility increase, which can be substantial in the convention phase. This mechanism, interestingly, also leads to to volatility fluctuations (or ‘heteroskedasticity’). These volatility fluctuations are characterized by the correlation time $`\tau `$, which become large when $`g`$ approaches or exceeds the threshold value $`g=1`$ (see Eq. (14)).

The above mechanism can easily be extended to the case where agents scrutinize $`M`$ different sources of information, say $`I_t^k`$, with $`k=1,\mathrm{}M`$. If the variation of these ‘indices’ are uncorrelated, it is easy to see that the simultaneous effect of all the different feedbacks leads to a volatility given by:

$$\mathrm{\Sigma }_t^2=\mathrm{\Sigma }_0^2(1+\underset{k=1}{\overset{M}{}}g_k^2C_{k,t}^2)+O(C^4)$$
(21)
(with obvious notations). Therefore, the volatility can be substantially increased if a large number of information sources are overly interpreted. Within the context of efficient markets theory, all decisions are based on some ‘real’ information. This corresponds, in the above formula, to choosing $`\mathrm{\Sigma }_0=0`$ (the price movements are all information-based) and $`C_{k,t}^0=\beta _k`$, where $`\beta _k`$ describes the ‘true’ causal relation between an economic indicator $`I^k`$ and $`P`$. What we have shown here is that because of the feedback loop, the empirical correlations (which are the only way to ‘learn’ the value of the $`\beta _k`$’s in the absence of any firmly grounded theoretical model) are distorted and amplified, leading to a much larger apparent $`C_{k,t}C_{k,t}^0`$, and therefore to a potentially considerable increase of the volatility as compared to its ‘fundamental’ value.

We believe that the above scenario for self-referential speculation is generic. When strategies are built using the outcome of past random events, a feedback loop can appear and destabilize the market from its putatively efficient behaviour. If the feedback is strong enough, a non trivial equilibrium can set in, where self-fulfilling prophecies can establish and survive. These conventions can have no rational basis whatsoever, or be the result of the amplification of a very small, but indeed objective, correlation.

## IV Price based strategies and market phases

### A Motivations

As recalled in the introduction, the basic tenet of the theory of efficient market is that prices instantaneously reflect all useful information. However, since all market participants face impact and slippage issues (due to the finite liquidity of any traded asset), those who believe that they have some useful information about future price changes must use it in such a way that their very action does not perturb too much the market. Otherwise, the potential gain associated to this information cannot be realized, or only on small volumes. Therefore, informed investors must, to some extent, ‘dilute’ their order in time. Doing so, they create positive temporal correlations – the slow incorporation of information into price is the ‘underreaction’ phenomenon described in . Other participants that see an increase of price can believe that it is due to some information not yet available to them, but that is reflected by the recent price change. These participants will be tempted to ‘jump in the bandwagon’ and act as trend followers: this is at the heart of the models developed in . Conversely, large orders in temporarily illiquid markets might affect the price too much (‘overreaction’), and some restoring trades will later on move the price back to a more realistic values.

Hence, there might indeed be deep reasons for which it can be useful to watch past price changes and be influenced by them. That this is the case is practice is beyond any doubt, and is confirmed by casual observation of traders in market rooms and by several formal surveys (, p. 47). In fact, it seems that price itself is, for many traders, the most relevant source of information (if not the only one, in the case of some hedge funds using statistical methods). As in many previous models, we thus consider that the information used by some agents to predict future prices is the past price change itself. However, at variance with some of these models, the economic reality of the correlations is in fact not needed, since in the strong feedback phase these correlations may spontaneously appear.

### B Trend following and contrarian conventions

In this section we therefore study the model where $`\delta I_t=\delta P_t`$. In this case, the above correlation coefficient $`C_t`$ becomes the autocorrelation of successive price changes. The above analysis is almost unchanged, up to a renormalisation of the coefficient $`h`$ that appears in the non linear term $`hC_t^3`$. This comes from the fact that the denominator in the linear filter, namely $`E[\delta P_t^2]`$, is now itself affected by the feedback effect. Hence, the phase transition found above for $`g=1`$ is also present in this case. In the convention phase $`g>1`$, the two states of the markets correspond to positive autocorrelations ($`C=+C^{}`$), which can be called a trend follower phase where past price changes tend to be followed by a change of the same sign, or to negative autocorrelations ($`C=C^{}`$) in the contrarian phase, where past price changes tend to be followed by a change of opposite sign. Let us emphasize that a ‘trend following’ period is not necessarily a period where the price steadily increases (or decreases), but rather a period where successive price changes have a large probability to be of the same sign (see the central period in Fig. 2, corresponding to $`C>0`$).

We show in Fig. 3 the histogram of $`C_t`$ from the numerical simulation of Eq.(8) with $`\mathrm{\Omega }_t`$ a white Gaussian noise and for two values of $`g`$. Note that without a symmetry breaking term, the average autocorrelation is zero even for $`g>1`$. We have here an interesting statistical process where the long time autocorrelation is zero, but where locally trends or anti-trends can appear and remain for quite long times. As mentioned in the introduction, this corresponds to the market folklore: practitioners often talk about market phases where trend following strategies are supposed to be profitable, and market phases where contrarian (mean reverting) strategies are supposed to work. Interestingly, any long term analysis of the average correlation coefficient would fail to reveal such phases.

### C Consequence on the volatility

An important consequence of the existence of conventions is that the coarse-grained volatility can be different from the instantaneous one. As above, the instantaneous volatility is increased compared to its bare value $`\mathrm{\Sigma }_0`$ and given by $`\mathrm{\Sigma }^2=\mathrm{\Sigma }_0^2(1+g^2C_t^2)`$. On the other hand, the coarse-grained volatility $`\mathrm{\Sigma }_{cg}`$, defined on an intermediate time scale $`T^{}`$ such that $`1T^{}\tau `$ (such that $`C_t`$ itself has not evolved significantly), is easily calculated to be:

$$\mathrm{\Sigma }_{cg,t}\frac{\mathrm{\Sigma }_0}{1gC_t}.$$
(22)
This shows that the volatility is increased in the trend following convention and decreased in the contrarian convention. This is illustrated in Fig. 2, where we show the result of a simulation corresponding to $`g=1.2`$ and $`ϵ=0.01`$, with a Gaussian noise term $`\mathrm{\Omega }_t`$. Note that the true long time square volatility is equal to the time average of $`\mathrm{\Sigma }_{cg,t}`$, and is dominated by the trend following phases.

Eq. (22) shows that the volatility can have large fluctuations, and long term correlations; in particular, in the $`g>1`$ phase, there are two time scales that govern the evolution of $`C_t`$. One, relatively short one, governs the fluctuations of $`C_t`$ around the dominant convention $`\pm C^{}`$; the other, that can be much longer, is given by the flip time $`\tau `$ between the two conventions, Eq. (14). It might be tempting to relate this to the well known fact that empirical volatility fluctuations reveal non exponential, multiscale relaxation in time .

Suppose that one is in the trend following convention. The typical duration $`𝒯`$ of a trend can be obtained by comparing the value of the coarse grained volatility to the instantaneous one:

$$𝒯\frac{1+gC^{}}{1gC^{}},(gC^{}1)$$
(23)
Hence, one can observe two types of dynamics when $`g>1`$. If the change of convention is faster than the typical duration of a trend, i.e. if $`\tau 𝒯`$, one obtains the dynamics shown in Figure 4-b, where a period of low volatility is followed by a few sudden trends, which can be of any sign. Note that this can only occur if $`ϵ`$ is large enough, which corresponds to a very short memory time, in other words that agents over-focus on very recent events. The phenomenology is in this case quite different from that shown in Fig. 2, where the price displays many trends before changing conventions.

Up to now, we have implicitly assumed that the parameters $`g`$ and $`ϵ`$ were constant. This allowed us to extract the salient features of the model. In reality, however, these parameters should themselves be thought of as time dependent. Remember that $`g`$ is larger when more traders (or larger volumes for the same number of traders) use past prices to decide on their action. It is clear that clear trending periods will increase the confidence in the trend following strategy and increase $`g`$. Although the full discussion of this extended model is beyond the scope of the present paper (see conclusion), we expect that reality might actually be a mixture of convention phases when $`g_t>1`$ and floating conventions or random phases when $`g_t<1`$. In this framework, crashes may be viewed as moments where both $`g_t`$ and $`ϵ`$ become large: in panic situations, one expects the memory time to become shorter as agents think that immediate information becomes crucial. This can create a strong temporary trend following convention that leads to a crash: see Fig. 4. As the convention accidentally flips over to the contrarian one, the volatility falls sharply and so does the perceived uncertainty. One can expect $`g_t`$ to become small again: the crash is over. For purposes of illustration and anecdotal evidence, we show in Fig. 4 a blow up of the 1987 crash period and the result of a simulation of our model.

### D A special case: regressing on the index

It is interesting to discuss the special case where the information $`I_t`$ is the stock index itself. It is clear that in practice, the evolution of stock prices on short time scales is strongly affected by the index, which is an immediately available piece of relevant information for all market participants. Let us call $`P_t^j`$ ($`j=1,\mathrm{},M`$) the price of the $`j`$-th stock belonging to the index. Then, assuming the index is computed as a equi-weight average over all the stocks, one has:

$$\delta I_t\frac{1}{M}\underset{j=1}{\overset{M}{}}\delta P_t^j.$$
(24)
One the other hand, the feedback effect of the index on the stock price can be written as:

$$\delta P_{t+1}^j=\mathrm{\Omega }_t^j+g_jC_{j,t}\frac{\delta I_t}{\mathrm{\Sigma }_I^2}+O(C_j^3),$$
(25)
where $`\mathrm{\Omega }_t^j`$ results from the trading not based on the index, $`C_{j,t}`$ is the empirical covariance between $`\delta P_{t+1}^j`$ and $`\delta I_t`$, and $`\mathrm{\Sigma }_I`$ is the index volatility. Using Eq. (24) one therefore finds, in the simple case where all $`g_j`$ are equal:

$$\delta I_{t+1}=\frac{1}{M}\underset{j=1}{\overset{M}{}}\mathrm{\Omega }_t^j+gC_t\frac{\delta I_t}{\mathrm{\Sigma }_I^2},$$
(26)
where $`C_t=_jC_{j,t}/M`$ is the covariance between $`\delta I_{t+1}`$ and $`\delta I_t`$.

In the case of the index, it is reasonable to think that the feedback is a very high frequency one; therefore $`\mathrm{\Delta }t=1`$ probably corresponds here to a few minutes. Summing (24) from $`t`$ to $`t+n`$ defines the return on a coarse-grained scale $`\mathrm{\Delta }I_t`$. Assuming that $`n\mathrm{\Delta }t\tau `$, such that $`C_t`$ is approximately constant, leads to:

$$\mathrm{\Delta }I_t=\frac{1}{M}\underset{j=1}{\overset{M}{}}\widehat{\mathrm{\Omega }}_t^j+g\widehat{C}_t\mathrm{\Delta }I_t,$$
(27)
which is valid when $`n1`$. In the above equation, $`\widehat{\mathrm{\Omega }}^j`$ is the aggregate of the noise $`\mathrm{\Omega }^j`$ over the time interval $`[t,t+n]`$, and $`\widehat{C}_t=C_t/\mathrm{\Sigma }_I^2`$. Finally,

$$\mathrm{\Delta }I_t=\frac{1}{M(1g\widehat{C}_t)}\underset{j=1}{\overset{M}{}}\widehat{\mathrm{\Omega }}_t^j.$$
(28)
If the $`\mathrm{\Omega }_t^j`$ were uncorrelated from one stock to the next, and in the absence of feedback, the index volatility would be very small compared to that of stocks (of order $`1/\sqrt{M}`$). Empirically, though, the U.S. stock index volatility is found to be as high as a third of the individual stock volatility. Of course, one expects that the $`\mathrm{\Omega }_t^j`$ are somewhat correlated, reflecting a common sensitivity to news. However, the correlation between stocks expected from fundamental analysis is insufficient to explain the observed correlation (and therefore the volatility of the index). The model presented here shows that a high frequency positive feedback leads to an increase of the index volatility by a factor $`1/(1g\widehat{C}_t)`$, which can be large. This increase is actually larger than the increase of the volatility of individual stocks induced by the above feedback (the factor is in that case $`\sqrt{1+g^2\widehat{C}_t^2}`$.

## V empirical evidence

The aim of this section is present some empirical data that support our contention that some anomalous correlations exist in financial markets, with persistence times which can be very long (ten years or so). We first present the case of the bond index vs. stock index correlation, which is interesting from the point of view of the present model because it might represent an empirical realization of the convention shift scenario predicted above. We then turn to the analysis of the (daily) lagged autocorrelations of the Dow Jones index during the 20th century, which are clearly found to be significant, and time dependent (positive – trend following, or negative – contrarian).

### A The bond/stock cross correlation

A very interesting example of rapid convention change has taken place in the 90’s, and concerns the correlation between stock markets and bond markets. The usual argument is that as long term rates fall, not only holding bonds becomes less profitable (bond prices rise) but also borrowing long term money becomes cheaper. Therefore stock markets become more attractive, and stock prices rise; this leads to a positive correlation between bond price changes and stock price changes. We compute the time dependent autocorrelation $`C_t`$ as an exponential moving average, as given in Eq. (3), where $`I_t`$ is the bond index and $`P_t`$ is the log price of the Dow-Jones. This correlation is indeed found to be positive, and very strong ($`0.5`$), in the beginning of the nineties (see Fig. 5). However, another story now seems to be dominant: a fall in stock markets signals an increased anxiety of the operators who sell their risky paper and buy non risky Government bonds. This has been called ‘Flight to Quality’. The result is a negative correlation between stock prices and bond prices. Fig. 5 shows very clearly that a change of convention has taken place in late 1997; the negative correlation is even stronger now (early 2003). Quite interestingly, this convention shift has taken place very abruptly due to a series of extreme events both on the stock market and on the bond market (see the inset of Fig 5), as would predict the model discussed in this paper. \[Note that we consider here equal time correlations of daily returns; using the argument presented in section III C, we expect a high frequency causal correlation to manifest itself as an equal time correlation on a coarser time scale.\]

### B The Dow Jones

We considered the detrended Dow-Jones index in the period 1900-2003, where the average return was subtracted. We have actually first fitted the log Dow-Jones as a second order polynomial in time, since the average return itself seems to have significantly increased between 1900 and 2000. Taking the raw returns without detrending in fact leads to the same conclusions. The reason is that the typical daily returns are much larger than the average trend. We again compute the time dependent autocorrelation $`C_t`$ as an exponential moving average, as given in Eq. (3), with now $`\delta I_t=\delta P_t`$, and where $`P_t`$ is the log price. Since the returns are non Gaussian, we compared all our results with a null hypothesis benchmark where all returns are multiplied by random independent signs, such as to keep the correct statistics of the amplitudes but remove all serial correlations. (Note however that in this procedure, the correlation in the volatility is preserved.)

We show in Fig. 6 the time evolution of $`C_t`$ computed for $`ϵ=0.001`$ for the real time series. One clearly sees that (i) $`C_t`$ can be substantially larger than expected if no correlations were present and (ii) the time scale for the evolution of $`C_t`$ can be much larger than $`1/ϵ3`$ years. Plateaus that last several decades can be observed. The histogram of different values of $`C_t`$ is shown in Fig. 5 and is markedly different from the one corresponding ‘scrambled’ series, for which all correlations are killed. (The hypothesis that the two distributions are the same is strongly rejected by the Kolmogorov-Smirnov test). The century was dominated by a positive correlation convention, especially between the 50’s and the 80’s. Nevertheless the negative correlation convention seems to appear after the 1929 during the Great Depression. There are also regimes where $`C_t`$ is close to zero. This suggests that in fact $`g`$ has varied over the years, with periods where $`g<1`$, with no clear trends nor anti-trends appearing, and periods where $`g>1`$, during which the market is ‘locked’ in one convention or the other. In order to check whether the plateau values appearing in Fig. 5 do indeed correspond to conventions, we have determined to probability distribution of $`C_t`$ with a smaller averaging time of 100 days ($`ϵ=0.01`$), and in restricted periods of time: (a) at the beginning of the 30’s (contrarian convention) and (b) between the 1950 and 1980 (trend following convention), see Fig. 7. The comparison with ‘scrambled’ data indeed shows a clear assymetry in both cases, that should not exist if all serial correlations were zero.

These curves show that conventions can persist up to 30 years. The change in convention can be rather smooth, like during the second part of the century. As we saw before, the value of the most probable value $`C^{}`$ is related to $`g`$, i.e. to the number of agents using a self-referential strategy. Then these smooth changes can be explained by a continuous change in the number of these agents. A change of convention can also occur suddenly, triggered by an extreme event, like it did after 1929. It can be explained as suggested above: before the crash, $`g`$ is smaller than unity and no clear convention exists. The crash induces an enormous uncertainty about the true value of stocks, and encourages agents to pay more attention to past price variations. This may have led to a substantial increase of $`g`$ that favored the appearance of a contrarian convention.

From the data, it appears that there might be a systematic bias towards the trend following convention. One in fact expects that some symmetry breaking term, favoring $`C>0`$, should exist in general: first, as mentioned in section IV A, there might be good reasons to think that positive correlations are indeed created by the time dilution of large orders, or other mechanisms. Also, for purely psychological reasons, trend following strategies are more likely to be adopted than contrarian strategies, because the pattern is much more obvious. This can be modeled by postulating that $`g`$ depends on the sign of $`C_t`$, with $`g_+>g_{}`$. Therefore, nicely symmetric histograms such as those presented in Fig. 3 are unlikely to be observed in real markets.

## VI Conclusion and Perspectives

In this paper, we have defined and studied a generic, parsimonious model that describes the feedback effect of self-referential behaviour. If sufficiently strong, this feedback destabilizes the market and non trivial correlations can spontaneously appear, or be anomalously amplified. In this case the market enters a new equilibrium state where strong correlations between a priori uncorrelated quantities might self consistently establish. These anomalous correlations lead to both excess volatility (that may display long memory) and excess cross correlations. An interesting outcome of our model is (i) the existence of correlations with an amplitude unrelated with any ‘rational’ value, and (ii) the appearance of a very long switching time scale, unrelated with the natural time scales of the dynamics (i.e. the ‘decision’ time scale $`\mathrm{\Delta }t`$ or the memory time $`T`$). Therefore, our model displays regime switching over long times scales, which by the way justifies why agents should use a finite memory time in order to measure correlations in an ever changing environment. It is also worthwhile emphasizing that if the price itself is used as a source of information, some linear autocorrelations do appear on intermediate time scales, but average out on time scales larger than this switching time. In other words, the price process has zero average linear correlations, but non zero local autocorrelations (trending or mean reverting). We have presented convincing empirical evidence that such conventions exist in financial markets; one of the most compelling case concerns the correlation between stock markets and bond markets, where both market ‘states’ can be observed: the correlation appears to have rapidly shifted in the last decade from being strongly positive to being negative.

The model could be extended in several directions. First, one could consider serial correlations beyond the elementary time lag $`\mathrm{\Delta }t`$, say between increments lagged by $`n\mathrm{\Delta }t`$. At the linear level, the stability criteria is easily shown to be $`g_n<1`$, where $`g_n`$ is the feedback strength corresponding to lag $`n\mathrm{\Delta }t`$. However, interesting non linear effects can appear. For example, with two lags $`n=1`$ and $`n=2`$, one can observe a ‘first order’ phase transition where the most probable value of $`C`$ discontinuously jumps from $`C=0`$ to $`\pm C^{}`$, with $`C^{}>0`$ even close to the transition. This is distinct from the ‘second order’ scenario explored in the present paper, where $`C^{}\sqrt{g1}`$. Second, one could consider the case where the different sources of informations $`\delta I_t^k`$ are themselves asset prices is quite interesting since the feedback loop also affects the cross-correlation between the different assets. Non trivial coupled convention dynamics can set in, in particular when the number of assets is small.

An ingredient that should be implemented is the feedback between the values of the coupling parameter $`g`$ and memory time $`1/ϵ`$, and the past price dynamics itself. As we have seen above, the value of $`g`$ is related to the number of agents (or more precisely the total volume of orders) that act in a self-referential way. It is clear that both in periods of large uncertainty (after a crash, for example) or within a speculative bubble where the trend following strategy appears to be successful, one expects the value of $`g_t`$ to grow. (A similar mechanism was recently considered within the ‘Grand Canonical’ version of the Minority Game, see ) It would be interesting to study a precise model where the dynamics of $`g_t`$ and that of the price and volatility are explicitly coupled, in the spirit of . One can expect that such a model would be able to capture a lot of the financial markets phenomenology. Along similar lines, if there are several sources of information $`\delta I_t^k`$, one should expect that the feedback of successful strategies onto the value of the couplings $`g_{k,t}`$ will be unstable in the sense that one of the $`g_k`$ will grow at the expense of the others, because the coordination of strategies leads to stronger self-fulfilling prophecies and therefore larger potential profits. In other words, this feedback between the tendency to follow a pattern and its predictability leads to a condensation of the strategies in a few prominent conventions, with abrupt transitions between those.

Finally, we need to discuss the above model from the point of view of Efficient Markets, and show how it should be modified to describe the long term behaviour of market prices. If the information is systematically over-interpreted and the volatility much too large compared to that of the ‘fundamental’ value, the price should go on long time scales to completely unrealistic values. More precisely, the difference between the ‘fair’ price and the market price would typically grow as $`\sqrt{T}`$. \[In mathematical terms, the market price and the fundamental price would not ‘cointegrate’.\]. The answer to that paradox is that in fact nobody knows the fair price of a stock more accurately than within, say, a factor of two. This was actually proposed by Black  (somewhat humoristically) as the definition of an efficient market, and this view seems to us to be fundamentally correct. For example, the historical analysis presented in , p. 8, shows that the price to earning ratio of U.S. stocks has indeed fluctuated, from 1900 to 2000, between $`10`$ and $`40`$. So it is reasonable to think that there is a wide band of prices across which arbitrage cannot take place, because of the lack of a reliable estimate of what the true price should be. As emphasized by Shleifer and others , arbitrage only makes sense if one can compare the relative price of two assets, but becomes very dodgy if one speaks about absolute values. Therefore, one expects that as long as the price is within a factor two of the ‘true’ price, no mean reversion term, induced by the presence of arbitrageurs, needs to be added to our dynamical equation for the price, Eq. (8). Mathematically, this mean reversion effect is described by adding to the right hand side of Eq. (8) a term proportional to $`\kappa \mathrm{log}(P_t/P_0)`$, where $`\kappa `$ measures the strength of the demand driven by fundamental considerations, and $`P_0`$ the true fair price (see also , where this term was introduced). On short time scales, or if $`\kappa `$ is sufficiently small, this term can be neglected and the analysis presented above should be valid. On long time scales, however, such that the random fluctuations become of the order of (say) 100 %, one should expect these mean reversion effects to become relevant. For a typical stock with a daily volatility of $`3\%`$, this corresponds to 1000 days, or four years. Such a time scale is precisely the typical reversion time scale discovered by de Bondt and Thaler in their paper on overreaction in stock markets . Hence, in a world where absolute references are lacking, one expects that the short to medium time scale dynamics of markets will be dominated by the self-referential effects described in the present paper.

## Acknowledgments

We thank M. Potters, J.P. Aguilar, I. Giardina, L. Laloux and A. Matacz for some important remarks and help with the data. We also thank X. Gabaix and A. Orlean for very useful comments that helped improving the manuscript.


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# 1 Abstract

## 1 Abstract

We apply concepts of random differential geometry connected to the random matrix ensembles of the random linear operators acting on finite dimensional Hilbert spaces. The values taken by random linear operators belong to the Liouville space. This Liouville space is endowed with topological and geometrical random structure. The considered random eigenproblems for the operators are applied to the quantum statistical systems. In the case of random quantum Hamiltonians we study both hermitean (self-adjoint) and non-hermitean (non-self-adjoint) operators leading to Gaussian and Ginibre ensembles Refs. , , .

 M. M. Duras, “Finite-difference distributions for the Ginibre ensemble,” J. Opt. B: Quantum Semiclass. Opt. 2, 287-291, 2000.

 M. M. Duras, K. Sokalski, “Finite Element Distributions in Statistical Theory of Energy Levels in Quantum Systems,” Physica D125, 260-274, 1999.

 M. M. Duras, K. Sokalski, “Higher-order finite-element distributions in statistical theory of nuclear spectra,” Phys. Rev. E  54, 3142-3148, 1996.

## 2 Introduction

We study generic quantum statistical systems with energy dissipation. Let us consider Hilbert’s space $`𝒱`$ with some basis $`\{|\mathrm{\Psi }_i\}`$. The space of the linear bounded operators $`\widehat{X}`$ acting on Hilbert space $`𝒱`$ is called Liouville space and is denoted $`(𝒱)`$. The Liouville space is again Hilbert’s space with the scalar product: $`\widehat{X}|\widehat{Y}=\mathrm{Tr}(\widehat{X}^{}\widehat{Y})`$. Hence, it is a Banach space with norm: $`\widehat{X}=(\widehat{X}|\widehat{X})^{1/2}`$, and it is metric space with distance: $`\rho (\widehat{X},\widehat{Y})=\widehat{X}\widehat{Y}`$. Finally, it is topological space with the balls $`B(\widehat{X},r)=\{\widehat{Y}|\rho (\widehat{Y},\widehat{X})<r\}`$. The Liouville space is also a differentiable manifold. The exist a tangent space $`\mathrm{T}_{\widehat{X}}(𝒱)`$, tangent bundle $`\mathrm{T}(𝒱)`$, cotangent space $`\mathrm{T}_{\widehat{X}}^{}(𝒱)`$, and cotangent bundle $`\mathrm{T}^{}(𝒱)`$. The quantum operator $`\widehat{X}(𝒱)`$ is in the given basis a matrix with elements $`X_{ij}`$. We are allowed to define random operator variable $`\widehat{𝒳}:\mathrm{\Omega }\omega \widehat{𝒳}(\omega )(𝒱),`$ where $`\mathrm{\Omega }`$ is sample space, and $`\omega `$ is sample point. In the basis it is reduced to random matrix variable $`𝒳:\mathrm{\Omega }\omega 𝒳(\omega )\mathrm{MATRIX}(N,N,𝐅),`$ where $`\mathrm{MATRIX}(N,N,𝐅)`$ is set of all $`N\times N`$ matrices with elements from the field $`𝐅`$ . Thus, we define random Hamiltonian operator variable $`\widehat{}:\mathrm{\Omega }\omega \widehat{}(\omega )(𝒱),`$ and we define random Hamiltonian matrix variable $`:\mathrm{\Omega }\omega (\omega )\mathrm{MATRIX}(N,N,𝐅)`$. Let us assume that the Hamiltonian $``$ is not hermitean operator, thus its eigenenergies $`Z_i`$ are complex-valued random variables. We assume that distribution of matrix elements $`H_{ij}`$ is governed by Ginibre ensemble . $`(\omega )`$ belongs to general linear Lie group GL($`N`$, C), where $`𝐂`$ is complex numbers field. Since $`(\omega )`$ is not hermitean, therefore quantum system is dissipative system. Ginibre ensemble of random matrices is one of many Gaussian Random Matrix ensembles GRME. The above approach is an example of Random Matrix theory RMT . The other RMT ensembles are for example Gaussian orthogonal ensemble GOE, unitary GUE, symplectic GSE, as well as circular ensembles: orthogonal COE, unitary CUE, and symplectic CSE. The distributions of the eigenenergies $`Z_1,\mathrm{},Z_N`$ for $`N\times N`$ Hamiltonian matrices is given by Jean Ginibre’s formula :

$`P(z_1,\mathrm{},z_N)=`$ (1)
$`={\displaystyle \underset{j=1}{\overset{N}{}}}{\displaystyle \frac{1}{\pi j!}}{\displaystyle \underset{i<j}{\overset{N}{}}}|z_iz_j|^2\mathrm{exp}({\displaystyle \underset{j=1}{\overset{N}{}}}|z_j|^2),`$
where $`z_i`$ are complex-valued sample points ($`z_i𝐂`$). For Ginibre ensemble we define complex-valued spacings $`\mathrm{\Delta }^1Z_i`$ and second differences $`\mathrm{\Delta }^2Z_i`$:

$$\mathrm{\Delta }^1Z_i=Z_{i+1}Z_i,i=1,\mathrm{},(N1),$$
(2)
$$\mathrm{\Delta }^2Z_i=Z_{i+2}2Z_{i+1}+Z_i,i=1,\mathrm{},(N2).$$
(3)
The $`\mathrm{\Delta }^2Z_i`$ are extensions of real-valued second differences

$$\mathrm{\Delta }^2E_i=E_{i+2}2E_{i+1}+E_i,i=1,\mathrm{},(N2),$$
(4)
of adjacent ordered increasingly real-valued energies $`E_i`$ defined for GOE, GUE, GSE, and Poisson ensemble PE (where Poisson ensemble is composed of uncorrelated randomly distributed eigenenergies) .

There is an analogy of Coulomb gas of unit electric charges pointed out by Eugene Wigner and Freeman Dyson. A Coulomb gas of $`N`$ unit charges moving on complex plane (Gauss’s plane) C is considered. The vectors of positions of charges are $`z_i`$ and potential energy of the system is:

$$U(z_1,\mathrm{},z_N)=\underset{i<j}{}\mathrm{ln}|z_iz_j|+\frac{1}{2}\underset{i}{}|z_i^2|.$$
(5)
If gas is in thermodynamical equilibrium at temperature $`T=\frac{1}{2k_B}`$ ($`\beta =\frac{1}{k_BT}=2`$, $`k_B`$ is Boltzmann’s constant), then probability density function of vectors of positions is $`P(z_1,\mathrm{},z_N)`$ Eq. (1). Complex eigenenergies $`Z_i`$ of quantum system are analogous to vectors of positions of charges of Coulomb gas. Moreover, complex-valued spacings $`\mathrm{\Delta }^1Z_i`$ are analogous to vectors of relative positions of electric charges. Finally, complex-valued second differences $`\mathrm{\Delta }^2Z_i`$ are analogous to vectors of relative positions of vectors of relative positions of electric charges.

The $`\mathrm{\Delta }^2Z_i`$ have their real parts $`\mathrm{Re}\mathrm{\Delta }^2Z_i`$, and imaginary parts $`\mathrm{Im}\mathrm{\Delta }^2Z_i`$, as well as radii (moduli) $`|\mathrm{\Delta }^2Z_i|`$, and main arguments (angles) $`\mathrm{Arg}\mathrm{\Delta }^2Z_i`$.

## 3 Second Difference Distributions

We define following random variables for $`N`$=3 dimensional Ginibre ensemble:

$$Y_1=\mathrm{\Delta }^2Z_1,A_1=\mathrm{Re}Y_1,B_1=\mathrm{Im}Y_1,$$
(6)
$$R_1=|Y_1|,\mathrm{\Phi }_1=\mathrm{Arg}Y_1,$$
(7)
and for the generic $`N`$-dimensional Ginibre ensemble : $`W_1=\mathrm{\Delta }^2Z_1`$.

Their distributions for are given by following formulae :

$`f_{Y_1}(y_1)=f_{(A_1,B_1)}(a_1,b_1)=`$ (8)
$`={\displaystyle \frac{1}{576\pi }}[(a_1^2+b_1^2)^2+24]\mathrm{exp}({\displaystyle \frac{1}{6}}(a_1^2+a_2^2)).`$
$$f_{A_1}(a_1)=\frac{\sqrt{6}}{576\sqrt{\pi }}(a_1^4+6a_1^2+51)\mathrm{exp}(\frac{1}{6}a_1^2),$$
(9)
$$f_{B_1}(b_1)=\frac{\sqrt{6}}{576\sqrt{\pi }}(b_1^4+6b_1^2+51)\mathrm{exp}(\frac{1}{6}b_1^2),$$
(10)
$`f_{R_1}(r_1)=`$ (11)
$`\mathrm{\Theta }(r_1){\displaystyle \frac{1}{288}}r_1(r_1^4+24)\mathrm{exp}({\displaystyle \frac{1}{6}}r_1^2),`$
$`f_{\mathrm{\Phi }_1}(\varphi _1)={\displaystyle \frac{1}{2\pi }},\varphi _1[0,2\pi ].`$
$`P_3(w_1)=`$ (12)
$`=\pi ^3{\displaystyle \underset{j_1=0}{\overset{N1}{}}}{\displaystyle \underset{j_2=0}{\overset{N1}{}}}{\displaystyle \underset{j_3=0}{\overset{N1}{}}}{\displaystyle \frac{1}{j_1!j_2!j_3!}}I_{j_1j_2j_3}(w_1),`$
$`I_{j_1j_2j_3}(w_1)=`$ (13)
$`=2^{2j_2}{\displaystyle \frac{^{j_1+j_2+j_3}}{^{j_1}\lambda _1^{j_2}\lambda _2^{j_3}\lambda _3}}F(w_1,\lambda _1,\lambda _2,\lambda _3)|_{\lambda _i=0},`$
$`F(w_1,\lambda _1,\lambda _2,\lambda _3)=`$ (14)
$`=A(\lambda _1,\lambda _2,\lambda _3)\mathrm{exp}[B(\lambda _1,\lambda _2,\lambda _3)|w_1|^2],`$
$`A(\lambda _1,\lambda _2,\lambda _3)=`$ (15)
$`={\displaystyle \frac{(2\pi )^2}{(\lambda _1+\lambda _2\frac{5}{4})(\lambda _1+\lambda _3\frac{5}{4})(\lambda _11)^2}},`$
$`B(\lambda _1,\lambda _2,\lambda _3)=`$ (16)
$`=(\lambda _11){\displaystyle \frac{2\lambda _1\lambda _2\lambda _3+\frac{1}{2}}{2\lambda _1+\lambda _2+\lambda _3\frac{9}{2}}}.`$
## 4 Conclusions

We compare second difference distributions for different ensembles by defining following dimensionless second differences:

$$C_\beta =\frac{\mathrm{\Delta }^2E_1}{<S_\beta >},$$
(17)
$$X_1=\frac{A_1}{<R_1>},$$
(18)
where $`<S_\beta >`$ are the mean values of spacings for GOE(3) ($`\beta =1`$), for GUE(3) ($`\beta =2`$), for GSE(3) ($`\beta =4`$), for PE ($`\beta =0`$) , and $`<R_1>`$ is mean value of radius $`R_1`$ for $`N`$=3 dimensional Ginibre ensemble .

On the basis of comparison of results for Gaussian ensembles, Poisson ensemble, and Ginibre ensemble we formulate homogenization law : Eigenenergies for Gaussian ensembles, for Poisson ensemble, and for Ginibre ensemble tend to be homogeneously distributed. The second differences’ distributions assume global maxima at origin for above ensembles. For Coulomb gas the vectors of relative positions of vectors of relative positions of charges statistically vanish. It can be called stabilisation of structure of system of electric charges.

## 5 Acknowledgements

It is my pleasure to most deeply thank Professor Jakub Zakrzewski for formulating the problem.


text:
# Energy gap of ferromagnet-superconductor bilayers

## 1 Introduction

Through the mechanism of Andreev reflection, a normal (non-superconducting) material in contact with a superconductor acquires superconducting phase coherence between its particle and hole wave functions, even though the pairing interactions vanish in this normal material. The associated superconducting correlations give rise to a finite value of the pair amplitude, $`F(𝐫)=\widehat{\psi }_{}(𝐫)\widehat{\psi }_{}(𝐫)`$. This is known as the proximity effect.

The proximity effect occurs also, in a modified way, if the non-superconductor is a ferromagnet. In this case, $`F(𝐫)`$ exhibits spatial oscillations. On the other hand, the pair potential itself, $`\mathrm{\Delta }(𝐫)`$ vanishes in the ferromagnet in the absence of attractive coupling. For conventional isotropic superconductors, $`\mathrm{\Delta }`$ is spatially independent, and corresponds to the minimum excitation energy in the spectrum, or the energy gap, $`E_g`$. For ferromagnet-superconductor systems, as in other inhomogeneous cases, $`\mathrm{\Delta }(𝐫)`$ depends on position, while the excitation gap for the whole system, $`E_g`$, obviously does not. The proximity effect can therefore result in $`E_g`$ and $`\mathrm{\Delta }`$ possessing a rather nontrivial relationship. In this paper we study this question for ferromagnet-superconductor (F/S) bilayers.

Several works involving nonmagnetic normal metal-superconductor heterostructures have discussed in various contexts, the presence or absence of an energy gap in the excitation spectrum. For a normal metal layer of width greater than the coherence length in the superconductor, $`\xi _0`$, but smaller than the phase coherence length $`L_\varphi `$, the appearance of a minigap of order of the Thouless energy has been reported, while if the normal layer is smaller than $`\xi _0`$, the induced gap is of order $`\mathrm{\Delta }`$. It was found that while interface roughness plays a role, the minigap persistence depends chiefly upon interface quality. These conclusions draw upon the results of calculations carried out within the quasiclassical formalism, which is applicable when certain conditions are satisfied. The main results are modified if the normal metal region is modeled as a non-Fermi liquid, where increased electron correlations may inhibit or completely destroy the minigap altogether.

For F/S structures, the magnetic exchange field in the ferromagnet results in quasiparticle spin splitting, and consequently the pair amplitude rapidly decays and oscillates over a characteristic length scale $`\xi _F`$, in which electron-hole pairs remain coherent. This modulation in phase of the pair amplitude has been shown to induce corresponding oscillations in the local density of states (DOS). Impurities in the magnet were shown to play a significant role in the determination of thermodynamic quantities. For ballistic F/S structures, the tunneling DOS for clean ferromagnet layers has been calculated for a wide range of exchange fields, and the local DOS has been found to exhibit a gapless state for all positions in the magnet. Configurations consisting of weak or thin ferromagnetic layers where $`d_F/\xi _F1`$, may lead to significantly different results, as we shall see below. The finite geometry can result in the quasiparticle amplitudes undergoing coherent Andreev and normal reflection (at the ferromagnet-insulator interface) in such a way that the minimum value of the excitation spectrum is nonzero due to the relatively slow characteristic decay of the pair amplitude. Thus, a gap develops. Associated with this, when the dimensions of the ferromagnet are reduced to a scale comparable to $`\xi _F`$, the greater confinement of the pairing correlations in the ferromagnet restricts the pair amplitude so that it no longer changes sign, and the DOS does not exhibit the corresponding oscillations.

It is generally accepted that the quasiclassical and dirty limit equations are satisfactory for studying many aspects of inhomogenous superconductivity. If however, the ferromagnet has dimensions of order of or smaller than the elastic mean free path $`\mathrm{}`$, so that quasiparticles undergo very few scattering events, the problem is more suitably solved within the ballistic regime. Furthermore, the inherent geometrical effects associated with ferromagnet layers only a few atomic spacings thick require a full microscopic theory that does not coarse-grain over length scales of order of the Fermi wavelength $`\lambda _F`$. Another constraint imposed upon the quasiclassical approximation is exhibited by the Andreev equations, whereby values of the quasiparticle momentum parallel to the interface, and comparable to the Fermi momentum, are crudely approximated. We will see below that in fact these quasiparticle states play a prominent role in the determination of the gap threshold for F/S systems.

Thus, we examine here the electronic spectrum of F/S bilayers and investigate under what conditions an energy gap can exist in such structures. The problem will be solved within the framework of the self-consistent solutions of the Bogoliubov de-Gennes (BdG) equations. We will calculate self-consistently the DOS, and excitation spectra of a thin ferromagnet film adjoining a bulk superconductor. This microscopic approach complements existing quasiclassical theories and serves to round the current knowledge.

In the next section, we introduce the method and geometry used in our model. In Sec. 3, the influence of the interface transparency, the magnitude of the exchange field, and the mismatch in Fermi levels on the energy gap and local DOS, will be presented.

## 2 Geometry and model

We consider a heterojunction of total length $`d`$ in the $`z`$-direction, consisting of a ferromagnet of thickness $`d_F`$ and a superconductor of thickness $`d_S`$. The planar interface is at $`z=d_F`$, and the free surfaces at $`z=0`$ and $`z=d`$ are specularly reflecting. Upon taking into account the translational invariance in the semi-infinite $`xy`$ plane, one can immediately write down the BdG equations for the spin-up and spin-down quasiparticle and quasihole wave functions $`(u_n^{},v_n^{})`$,

$`\left[{\displaystyle \frac{1}{2m}}{\displaystyle \frac{^2}{z^2}}+\epsilon _{}+W(z)E_F(z)\right]u_n^{}(z)+\mathrm{\Delta }(z)v_n^{}(z)`$ $`=`$ $`ϵ_nu_n^{}(z),`$ (1)
$`\left[{\displaystyle \frac{1}{2m}}{\displaystyle \frac{^2}{z^2}}+\epsilon _{}+W(z)E_F(z)\right]v_n^{}(z)+\mathrm{\Delta }(z)u_n^{}(z)`$ $`=`$ $`ϵ_nv_n^{}(z),`$ (2)
where $`\epsilon _{}`$ is the transverse kinetic energy, $`ϵ_n`$ are the quasiparticle energy eigenvalues, $`h_0(z)=h_0\mathrm{\Theta }(zd_F)`$ is the magnetic exchange energy, and $`\mathrm{\Delta }(z)`$ is the pair potential. Scattering at the interface is modeled by the potential $`W(z)=W\delta (zd_F)`$, where $`W`$ is the barrier strength parameter. We take the quantity $`E_F(z)`$ to equal $`E_{FM}`$ in the magnetic side, so that $`E_FE_{FM}+h_0`$, and $`E_FE_{FM}h_0`$, while in the superconducting side, $`E_F(z)E_F`$. From the symmetry of the problem, the solutions for the other set of wavefunctions $`(u_n^{},v_n^{})`$ are easily obtained from those of Eqns. (1,2) by allowing for both positive and negative energies. The BdG equations are supplemented by the self consistency condition for the pair potential,

$$\mathrm{\Delta }(z)=\frac{g(z)}{2}\underset{ϵ_n\omega _D}{}\left[u_n^{}(z)v_n^{}(z)+u_n^{}(z)v_n^{}(z)\right]\mathrm{tanh}(ϵ_n/2T),$$
(3)
where $`T`$ is the temperature, $`g(z)`$ is the effective coupling constant, describing the electron-electron interaction, and $`\omega _D`$ is the Debye energy.

## 3 Results

In the following, we consider a thin ferromagnet layer adjacent to a bulk limit $`(d_S\xi _0)`$ superconductor. To focus on the parameter range which may yield a gap in the energy spectrum, the thickness of the ferromagnet considered will not exceed the coherence length in the superconductor, i.e., $`d_F<\xi _0`$. We introduce the dimensionless parameter $`Z`$ to characterize the barrier strength, with $`ZmW/k_F`$, and the measure of mismatch between the Fermi levels is given by the ratio $`\mathrm{\Lambda }E_{FM}/E_F`$. The requirement of self-consistency in the problem excludes the possibility of an analytical solution. The BdG equations (1,2) are therefore solved numerically using the approach outlined in the Appendix. We assume the low temperature regime (we take $`T/T_c=0.02`$), and a superconducting coherence length $`\xi _0`$ of $`k_F\xi _0=50`$, where $`k_F`$ is the Fermi wavevector of the superconductor.

The energy gap, $`E_g`$, is the minimum binding energy of a Cooper pair, and its existence will influence various thermodynamic measurements, including heat capacity and thermal conductivity. For other configurations, such as long superconductor-normal metal-superconductor junctions, the gap in the metal and the bulk gap in the superconductor can further inhibit thermal transport.

The process of finding $`E_g`$ is computationally demanding, as it involves calculating self-consistently the entire eigenvalue spectrum and then finding its minimum, for each value of $`d_F`$. In Fig.1 we illustrate our results for the dependence of $`E_g`$ on the thickness of the ferromagnet layer. These results are for $`Z=0`$ and $`\mathrm{\Lambda }=1`$. Results for four different exchange fields in the ferromagnet are presented. The top dashed curve corresponds to $`h_0/\mathrm{\Delta }_0=0`$, while the subsequent lower curves are for finite values of the exchange field as labeled in the figure. All curves start at $`E_g=\mathrm{\Delta }_0`$ for $`d_F=0`$, corresponding to the expected result for a single superconductor in the bulk limit. As the ferromagnet layer grows, $`E_g`$ decays monotonically towards a gapless superconducting state, at a rate that depends strongly on the strength of $`h_0`$. In the limit of zero exchange field (normal metal), the gap ceases to exist when $`d_F\xi _0`$. This thickness at which $`E_g`$ is destroyed is much smaller than the proximity length characterizing the usual very slow decay of the pair amplitude in the metal. This trend continues for finite $`h_0`$, with $`E_g`$ vanishing much more rapidly than the characteristic decay length of the pair amplitude in the magnet. To illustrate this, recall the approximate expression for the characteristic length of decay of the pair amplitude in the ferromagnet: $`\xi _F(k_Fk_F)^1`$, which can be rewritten as,

$$k_{FM}\xi _F\frac{\pi }{2}\mathrm{\Lambda }^{3/2}\left(\frac{\mathrm{\Delta }_0}{h_0}\right)k_F\xi _0.$$
(4)
Thus for example, the $`h_0/\mathrm{\Delta }_0=4.0`$ curve in Fig. 1 shows the energy gap vanishing at $`k_{FM}d_F7.5`$, while the pair amplitude decays over the larger length scale $`k_{FM}\xi _F20`$. The discrepancy is even larger if one recalls that the expected decay length might be thought to be a factor of $`2\pi `$ larger. For the largest field shown ($`h_0/\mathrm{\Delta }_0=8`$), the superconducting correlations are further inhibited, failing to generate a gap in the energy spectrum except for ferromagnet nanostructures satisfying $`k_Fd_F5`$.

To provide additional perspective on the spectral features of the proximity effect, we show in Fig. 2 a relevant portion ($`|ϵ_n/\mathrm{\Delta }_0|1`$) of the calculated eigenvalues as obtained (under the same conditions as in the previous Figure) for given transverse energies, $`\epsilon _{}`$. For a homogeneous superconductor, a gap separates the continuum states that exist for $`|ϵ_n/\mathrm{\Delta }_0|>1`$. With the inclusion of a ferromagnet, in addition to the scattering states there exists a discrete quasiparticle excitation spectrum in the range $`|ϵ_n/\mathrm{\Delta }_0|<1`$ (see Fig. 2). The bound states are visibly asymmetric about the Fermi level due to the effects the exchange field has on the particle-hole amplitudes. The existence of a finite number of bound-state branches of localized quasiparticles is also characteristic of antisymmetric domain walls. In Fig. 2 we can further see that the minimum in $`|ϵ_n|`$, which corresponds to the energy gap seen in Fig. 1 for $`k_Fd_F=15`$, where $`E_g0.09\mathrm{\Delta }_0`$, is sharp, and that it occurs for quasiparticles whose in-plane momentum is close to the Fermi level ($`\epsilon _{}/E_F1`$). This is due in part to those quasiparticles not coupling to those states responsible for superconductivity. This result is typical of what we find for other exchange fields, the only difference being the value of $`E_g`$ \[see Fig. 1\]. It is therefore those excitations with a dominant momentum component parallel to the interface, that are significant in contributing to the filling in of the gap. In the Andreev or quasiclassical approximation scheme, these quasiparticles have “trajectories” which are not treated accurately, and those with $`\epsilon _{}/E_F>1`$ are neglected altogether. This discrepancy has also been revealed in normal metal-superconductor systems, where normal reflection dominates the Andreev reflection process for quasiparticles with large momentum parallel to the interface.

The previous results in Fig. 1 showed the strong influence the exchange energy has on $`E_g`$. Another quantity of great experimental interest is the local density of one particle excitations in the magnet. Current experimental tools such as the scanning tunneling microscope (STM) have atomic scale resolution, and make this quantity experimentally accessible. When well defined quasiparticles exist, the tunneling current is simply expressed as a convolution of the one-particle spectral function of the STM tip with the spectral function for the F/S system. The resultant tunneling conductance, which is proportional to the density of states (DOS), is then given as a sum of the individual contributions to the DOS from each spin channel.

$$N(z,\epsilon )=N_{}(z,\epsilon )+N_{}(z,\epsilon ),$$
(5)
where the local DOS for each spin state is given by

$`N_{}(z,ϵ)`$ $`=`$ $`{\displaystyle \underset{n}{}}\left\{[u_n^{}(z)]^2f^{}(ϵϵ_n)+[v_n^{}(z)]^2f^{}(ϵ+ϵ_n)\right\},`$ (6)
$`N_{}(z,ϵ)`$ $`=`$ $`{\displaystyle \underset{n}{}}\left\{[u_n^{}(z)]^2f^{}(ϵϵ_n)+[v_n^{}(z)]^2f^{}(ϵ+ϵ_n)\right\}.`$ (7)
Here thermal broadening is accounted for by the derivative of the Fermi function, $`f^{}(ϵ)=f/ϵ`$. To investigate further how the previous results interrelate with the local DOS (Eq. 5), we show in Fig. 3 the

local DOS $`N(ϵ)`$, defined as $`N(z,\epsilon )`$ integrated over the ferromagnetic layer. This quantity is shown for two exchange fields, differing by a factor of ten. The ferromagnet has a thickness of $`d_F=9k_F^1`$: from Fig. 1 this corresponds to an energy gap of $`E_g0.5`$ for $`h_0/\mathrm{\Delta }_0=0.8`$, and an absence of an energy gap for $`h_0/\mathrm{\Delta }_0=8`$. This is consistent with the DOS calculations, as Fig. 3 illustrates: for the smaller exchange field, there is a complete absence of states for $`ϵ/\mathrm{\Delta }_00.5`$, while the DOS is gapless at all energies for $`h_0/\mathrm{\Delta }_0=8`$. The observed energy gap for $`h_0/\mathrm{\Delta }_0=0.8`$ is a result of the underlying competition between quantum size effects and constructive interference between the spin-split quasiparticle amplitudes. As expected, the particle-hole asymmetry is more prevalent in the stronger magnet (within the subgap region), as the two uppermost peaks are clearly shifted relative to one another.

Next we consider the effect that an interface barrier or Fermi energy mismatch has on the electronic structure. Experimentally, some degree of Fermi energy mismatch is unavoidable, particularly with alloys, and the transparency of the interface can be degraded due to a thin oxide layer. In Fig. 4 we illustrate the normalized energy gap $`E_g`$ as a function

of $`k_{FM}d_F`$ (where $`k_{FM}`$ is the wavevector corresponding to $`E_{FM}`$), for two $`\mathrm{\Lambda }`$ and $`Z`$ values that each differ by a factor of three. We fix the exchange field at $`h_0=0.8\mathrm{\Delta }_0`$, keeping in mind that higher fields obey similar trends so that generality is not lost. Also, in order to isolate each of the effects, whenever $`\mathrm{\Lambda }`$ is different from unity, $`Z`$ is zero, and vice versa. The figure shows that increased mismatch (smaller $`\mathrm{\Lambda }`$) or increased interface scattering (larger $`Z`$), induces the same trend of reducing $`E_g`$ as a function of $`k_{FM}d_F`$. The functional form of the graphs are distinct however: for $`\mathrm{\Lambda }<1`$, the tail-end decay is slower than the near linear decay in $`E_g`$ exhibited in the case of finite $`Z`$. Further differences in the effects of the two parameters are even more evident in the DOS spectra. To this end, Fig. 5

shows the DOS in the ferromagnet for two different values of the mismatch parameter $`\mathrm{\Lambda }`$, and one value of $`Z`$. Upon comparison with the previous Fig. 4, we again find consistency between the DOS and $`E_g`$ calculations: the energy gap is reduced at $`k_{FM}d_F=10`$ for both $`\mathrm{\Lambda }=0.2`$, and $`Z=0.2`$. This is reflected in the DOS, where Fig. 5 illustrates a small but finite number of states centered about the Fermi level. Although the quasiparticle spectrum has just turned gapless for $`\mathrm{\Lambda }=0.2`$, and $`Z=0.2`$, the DOS signature is substantially different, the most prominent feature being the larger number of subgap bound states for $`\mathrm{\Lambda }=0.2`$, which can be attributed to the larger Fermi energy mismatch, and subsequently, increased normal reflections.

## 4 Conclusions

We have self-consistently calculated the electronic structure for a F/S heterostructure consisting of a thin ferromagnet layer adjoining a bulk superconductor. Our fully microscopic method revealed the dependence of the transition to a gapless superconducting state on the relevant physical parameters such as exchange field energy, interface transparency, and Fermi energy mismatch. The energy gap decreases with the width of the F layer at a rate that depends upon the dimensionless ferromagnet width $`k_{FM}d_F`$. The characteristic length for gap suppression is much smaller than the length scale describing the decay of the pair amplitude in the ferromagnet: thus $`E_g`$ is suppressed more rapidly than the pair amplitude. Fermi level mismatch and interface barrier both serve to reduce the gap further, however the functional forms of the respective reductions are different. The local DOS in the ferromagnet is in all cases consistent with the above observations. The self-consistent quasiparticle spectra reveals that the gap onset is due to quasiparticle states with a large momentum component parallel to the interface. These states however, occupy a relatively small region of momentum space, and when calculating integral quantities over the full solid angle, good agreement between our exact theory and quasiclassical theory might be possible.

We have focused here on the spectral properties of the ferromagnet, in the clean limit. This regime is most appropriate for layers whose dimensions do not exceed the mean free path ($`d_F\mathrm{}`$). Since, we have considered only thin layers, this assumption is consistent with our calculations. For situations where the effects of impurities or inelastic effects may be important, a finite DOS at low energies would likely arise. The general method used here however has found good overall agreement with experiments involving thin nonmagnetic normal metal-superconductor bilayers, and bulk F/S structures. Furthermore, previous calculations within the ballistic limit have also found agreement with experiment. Other complexities may arise in actual experimental conditions, such as grain boundaries and domain walls not accounted for here. The fabrication of relatively clean heterostructures, and structures with highly transparent interfaces is possible however. Our calculations are therefore realistic, and the results should be reproducible experimentally.

## Appendix A Numerical method

We solve Eqns. (1,2) by expanding the quasiparticle amplitudes in terms of a finite subset of a set of orthonormal basis vectors, $`u_n^{}(z)=_qu_{nq}^{}\varphi _q(z)`$, and $`v_n^{}(z)=_qv_{nq}^{}\varphi _q(z)`$. We use the complete set of eigenfunctions $`\varphi _q(z)=z|q=\sqrt{2/d}\mathrm{sin}(k_qz)`$, where $`k_q=q/\pi d`$, and $`q`$ is a positive integer. The finite range of the pairing interaction $`\omega _D`$ permits the number $`N`$ of such basis vectors to be cut off in the usual way. Once this is done, we arrive at the following $`2N\times 2N`$ matrix eigensystem,

$`\left[\begin{array}{cc}H^+& D\\ D& H^{}\end{array}\right]\mathrm{\Psi }_n=ϵ_n\mathrm{\Psi }_n,`$ (10)
where $`\mathrm{\Psi }_n^T=(u_{n1}^{},\mathrm{},u_{nN}^{},v_{n1}^{},\mathrm{},v_{nN}^{}).`$ The matrix elements $`H_{qq^{}}^+`$ connecting $`\varphi _q`$ to $`\varphi _q^{}`$ are constructed from the term found in brackets in Eq.(1),

$`H_{qq^{}}^+`$ $`=`$ $`q\left|{\displaystyle \frac{1}{2m}}{\displaystyle \frac{^2}{z^2}}+\epsilon _{}+W(z)E_F(z)\right|q^{}`$ (11)
$`=`$ $`\left[{\displaystyle \frac{k_q^2}{2m}}+\epsilon _{}\right]\delta _{qq^{}}+{\displaystyle _0^d}𝑑z\varphi _q(z)W(z)\varphi _q^{}(z)E_F{\displaystyle _0^{d_F}}𝑑z\varphi _q(z)\varphi _q^{}(z)`$
$``$ $`E_F{\displaystyle _{d_F}^d}𝑑z\varphi _q(z)\varphi _q^{}(z).`$
The expression for $`H_{qq^{}}^{}`$ is calculated similarly using Eq.(2). The “off-diagonal” matrix elements $`D_{qq^{}}`$ are given as,

$`D_{qq^{}}`$ $`=`$ $`q\left|\mathrm{\Delta }(z)\right|q^{}={\displaystyle _{d_F}^d}𝑑z\varphi _q(z)\mathrm{\Delta }(z)\varphi _q^{}(z).`$ (12)
After performing the integrations, Eq.(11) can be expressed as

$`H_{qq^{}}^+`$ $`=`$ $`{\displaystyle \frac{2W}{d}}\mathrm{sin}(k_qd_F)\mathrm{sin}(k_q^{}d_F){\displaystyle \frac{E_F}{d}}\left[{\displaystyle \frac{\mathrm{sin}[(k_q^{}k_q)d_F]}{(k_q^{}k_q)}}{\displaystyle \frac{\mathrm{sin}[(k_q^{}+k_q)d_F]}{(k_q^{}+k_q)}}\right]`$ (13)
$``$ $`{\displaystyle \frac{E_F}{d}}\left[{\displaystyle \frac{\mathrm{sin}[(k_q^{}+k_q)d_F]}{(k_q^{}+k_q)}}{\displaystyle \frac{\mathrm{sin}[(k_q^{}k_q)d_F]}{(k_q^{}k_q)}}\right],qq^{},`$
while the diagonal matrix elements are written as,

$`H_{qq^{}}^+`$ $`=`$ $`\left[{\displaystyle \frac{k_q^2}{2m}}+\epsilon _{}\right]+{\displaystyle \frac{W}{d}}\left[1\mathrm{cos}(2k_qd_F)\right]{\displaystyle \frac{E_F}{d}}\left[d_F{\displaystyle \frac{\mathrm{sin}(2k_qd_F)}{2k_q}}\right]`$ (14)
$``$ $`{\displaystyle \frac{E_F}{d}}\left[d_S+{\displaystyle \frac{\mathrm{sin}(2k_qd_F)}{2k_q}}\right],q=q^{}.`$
The self-consistency condition, Eq.(3) is now transformed into,

$$\mathrm{\Delta }(z)=\frac{\pi \lambda }{k_Fd}\underset{p,p^{}}{}\underset{q}{}𝑑\epsilon _{}\left[u_{np}^{}v_{np^{}}^{}+u_{np}^{}v_{np^{}}^{}\right]\mathrm{sin}(k_pz)\mathrm{sin}(k_p^{}z)\mathrm{tanh}(ϵ_n/2T),$$
(15)
where $`\lambda =g(z)N(0)`$, and $`N(0)`$ is the DOS for both spins of the superconductor in the normal state. The quantum numbers $`n`$ encompass the continuous transverse energy $`\epsilon _{}`$, and the quantized longitudinal momentum index $`q`$. The matrix eigensystem Eq. (10) and the self-consistency condition (15) are then solved numerically, using an iterative scheme developed and described in earlier work.