Related papers: Bubbles and Market Crashes
We study and generalize in various ways the model of rational expectation (RE) bubbles introduced by Blanchard and Watson in the economic literature. First, bubbles are argued to be the equivalent of Goldstone modes of the fundamental…
The volatility of financial instruments is rarely constant, and usually varies over time. This creates a phenomenon called volatility clustering, where large price movements on one day are followed by similarly large movements on successive…
We contrast Arbitrage Pricing Theory (APT), the theoretical basis for the development of financial instruments, with a dynamical picture of an interacting market, in a simple setting. The proliferation of financial instruments apparently…
We discuss several models in order to shed light on the origin of power-law distributions and power-law correlations in financial time series. From an empirical point of view, the exponents describing the tails of the price increments…
We propose a picture of stock market crashes as critical points in a hierachical system with discrete scaling. The critical exponent is then complex, leading to log-periodic fluctuations in stock market indexes. We present ``experimental''…
This paper presents an exclusive classification of the largest crashes in Dow Jones Industrial Average (DJIA), SP500 and NASDAQ in the past century. Crashes are objectively defined as the top-rank filtered drawdowns (loss from the last…
We present a model of financial markets originally proposed for a turbulent flow, as a dynamic basis of its intermittent behavior. Time evolution of the price change is assumed to be described by Brownian motion in a power-law potential,…
A slender object undergoing an axial compression will buckle to alleviate the stress. Typically the morphology of the deformed object depends on the bending stiffness for solids, or the viscoelastic properties for liquid threads. We study a…
We introduce the concept of "negative bubbles" as the mirror image of standard financial bubbles, in which positive feedback mechanisms may lead to transient accelerating price falls. To model these negative bubbles, we adapt the…
By combining (i) the economic theory of rational expectation bubbles, (ii) behavioral finance on imitation and herding of investors and traders and (iii) the mathematical and statistical physics of bifurcations and phase transitions, the…
This paper provides robust, new evidence on the causal drivers of market troughs. We demonstrate that conclusions about these triggers are critically sensitive to model specification, moving beyond restrictive linear models with a flexible…
In this brief review, we critically examine the recent work done on correlation-based networks in financial systems. The structure of empirical correlation matrices constructed from the financial market data changes as the individual stock…
We explore nature of price formation in financial markets and develop a theory of bid and ask price dynamics in which the two prices form due to quantum-chaotic interaction between buy and sell orders. In this model bid and ask prices are…
A simple spin model is studied, motivated by the dynamics of traders in a market where expectation bubbles and crashes occur. The dynamics is governed by interactions which are frustrated across different scales: While ferromagnetic…
Statistical analysis of financial data most focused on testing the validity of Brownian motion (Bm). Analysis performed on several time series have shown deviation from the Bm hypothesis, that is at the base of the evaluation of many…
This paper shows that jumps in financial asset prices are often erroneously identified and are, in fact, rare events accounting for a very small proportion of the total price variation. We apply new econometric techniques to a comprehensive…
This paper introduces a new approach for bubble detection based on mixed causal and noncausal autoregressive processes and their tail process representation during an explosive episode. Departing from traditional definitions of bubbles as…
Chaos is widely understood as being a consequence of sensitive dependence upon initial conditions. This is the result of an instability in phase space, which separates trajectories exponentially. Here, we demonstrate that this criterion…
Noncausal, or anticipative, heavy-tailed processes generate trajectories featuring locally explosive episodes akin to speculative bubbles in financial time series data. For $(X_t)$ a two-sided infinite $\alpha$-stable moving average (MA),…
This is a supplement to the paper "Liquidity based modeling of asset price bubbles via random matching". The supplement is organized as follows. First, we prove Theorem 3.13 in [1] which provides the existence of the dynamical system D…