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Fearless versus fearful speculative financial bubbles

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  • Andersen, J.V.
  • Sornette, D.
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    Abstract

    Using a recently introduced rational expectation model of bubbles, based on the interplay between stochasticity and positive feedbacks of prices on returns and volatility, we develop a new methodology to test how this model classifies nine time series that have been previously considered as bubbles ending in crashes. The model predicts the existence of two anomalous behaviors occurring simultaneously: (i) super-exponential price growth and (ii) volatility growth, that we refer to as the “fearful singular bubble” regime. Out of the nine time series, we find that five pass our tests and can be characterized as “fearful singular bubbles”. The four other cases are the information technology Nasdaq bubble and three bubbles of the Hang Seng index ending in crashes in 1987, 1994 and 1997. According to our analysis, these four bubbles have developed with essentially no significant increase of their volatility. This paper thus proposes that speculative bubbles ending in crashes form two groups hitherto unrecognized, namely those accompanied by increasing volatility (reflecting increasing risk perception) and those without change of volatility (reflecting an absence of risk perception).

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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 337 (2004)
    Issue (Month): 3 ()
    Pages: 565-585

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    Handle: RePEc:eee:phsmap:v:337:y:2004:i:3:p:565-585

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    Related research

    Keywords: Rational bubbles; Finite time singularity; Nonlinearity;

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    Cited by:
    1. T. Kaizoji & D. Sornette, 2008. "Market bubbles and crashes," Papers 0812.2449, arXiv.org.
    2. Fry, J. M., 2009. "Bubbles and contagion in English house prices," MPRA Paper 17687, University Library of Munich, Germany.
    3. Fry, J. M., 2010. "Bubbles and crashes in finance: A phase transition from random to deterministic behaviour in prices," MPRA Paper 24778, University Library of Munich, Germany.
    4. Fry, J. M., 2009. "Statistical modelling of financial crashes: Rapid growth, illusion of certainty and contagion," MPRA Paper 16027, University Library of Munich, Germany.
    5. Fry, J. M., 2010. "Gaussian and non-Gaussian models for financial bubbles via econophysics," MPRA Paper 27307, University Library of Munich, Germany.
    6. Sornette, Didier & Woodard, Ryan & Yan, Wanfeng & Zhou, Wei-Xing, 2013. "Clarifications to questions and criticisms on the Johansen–Ledoit–Sornette financial bubble model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4417-4428.
    7. Li Lin & Didier Sornette, 2009. "Diagnostics of Rational Expectation Financial Bubbles with Stochastic Mean-Reverting Termination Times," Papers 0911.1921, arXiv.org.
    8. Yukalov, V.I. & Sornette, D. & Yukalova, E.P., 2009. "Nonlinear dynamical model of regime switching between conventions and business cycles," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 206-230, May.
    9. D. Sornette, 2008. "Nurturing breakthroughs: lessons from complexity theory," Journal of Economic Interaction and Coordination, Springer, vol. 3(2), pages 165-181, December.
    10. D. Sornette & R. Woodard, . "Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis," Working Papers CCSS-09-003, ETH Zurich, Chair of Systems Design.
    11. V. I. Yukalov & D. Sornette & E. P. Yukalova, 2007. "Nonlinear Dynamical Model of Regime Switching Between Conventions and Business Cycles," Papers nlin/0701014, arXiv.org.
    12. Didier Sornette & Ryan Woodard, 2009. "Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis," Papers 0905.0220, arXiv.org.

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