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Can we predict crashes? The case of the Brazilian stock market

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Author Info

  • Cajueiro, Daniel O.
  • Tabak, Benjamin M.
  • Werneck, Filipe K.

Abstract

In this study we analyze Brazilian stock prices to detect the development of bubbles and crashes in individual stocks using a log-periodic equation. We implement a genetic algorithm to calibrate the parameters of the model and we test the methodology for the most liquid stocks traded on the Brazilian Stock Market (Bovespa). In order to evaluate whether this approach is useful we employ nonparametric statistics and test whether returns after the predicted crash are negative and lower than returns before the crash. Empirical results are consistent with the prediction hypothesis, e.g., the method applied can be used to forecast the end of asset bubbles or large corrections in stock prices.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378437108009898
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Bibliographic Info

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

Volume (Year): 388 (2009)
Issue (Month): 8 ()
Pages: 1603-1609

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Handle: RePEc:eee:phsmap:v:388:y:2009:i:8:p:1603-1609

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

Related research

Keywords: Crash; Bubbles; Log-periodic power law; Prediction; Econophysics;

References

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  19. Grech, D & Mazur, Z, 2004. "Can one make any crash prediction in finance using the local Hurst exponent idea?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 336(1), pages 133-145.
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Citations

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Cited by:
  1. Matsushita, Raul & Figueiredo, Annibal & Da Silva, Sergio, 2012. "A suggested statistical test for measuring bivariate nonlinear dependence," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(20), pages 4891-4898.
  2. Daniel Traian Pele & Miruna Mazurencu-Marinescu & Peter Nijkamp, 2013. "Herding Behaviour, Bubbles and Log Periodic Power Laws in Illiquid Stock Markets. A Case Study on the Bucharest Stock Exchange," Tinbergen Institute Discussion Papers 13-109/VIII, Tinbergen Institute.
  3. Tomson Ogwang, 2011. "Power laws in top wealth distributions: evidence from Canada," Empirical Economics, Springer, vol. 41(2), pages 473-486, October.

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