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From Rational Bubbles to Crashes

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  • D. Sornette

    (Univ. Nice/CNRS and UCLA)

  • Y. Malevergne

    (Univ. Nice/CNRS)

Abstract

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 rational pricing equation, associated with the symmetry-breaking introduced by non-vanishing dividends. Generalizing bubbles in terms of multiplicative stochastic maps, we summarize the result of Lux and Sornette that the no-arbitrage condition imposes that the tail of the return distribution is hyperbolic with an exponent mu

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Paper provided by arXiv.org in its series Papers with number cond-mat/0102305.

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Date of creation: Feb 2001
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Publication status: Published in Physica A 299, 40-59 (2001)
Handle: RePEc:arx:papers:cond-mat/0102305

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  1. D. Sornette, 2000. ""Slimming" of power law tails by increasing market returns," Papers cond-mat/0010112, arXiv.org, revised Sep 2001.
  2. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198292272, October.
  3. Y. Malevergne & D. Sornette, 2001. "Multi-dimensional rational bubbles and fat tails," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 1(5), pages 533-541.
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Cited by:
  1. Jaehyung Choi, 2011. "Spontaneous symmetry breaking of arbitrage," Papers 1107.5122, arXiv.org, revised Apr 2012.
  2. Marie Briere & Ariane Chapelle & Ariane Szafarz, 2008. "No contagion, only globalization and flight to quality," DULBEA Working Papers, ULB -- Universite Libre de Bruxelles 08-22.RS, ULB -- Universite Libre de Bruxelles.
  3. Szafarz, Ariane, 2012. "Financial crises in efficient markets: How fundamentalists fuel volatility," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(1), pages 105-111.
  4. D. Sornette & A. Johansen, 2001. "Significance of log-periodic precursors to financial crashes," Papers cond-mat/0106520, arXiv.org.
  5. John M. Fry, 2009. "Statistical modelling of financial crashes: Rapid growth, illusion of certainty and contagion," EERI Research Paper Series EERI_RP_2009_10, Economics and Econometrics Research Institute (EERI), Brussels.
  6. 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.
  7. Choi, Jaehyung, 2012. "Spontaneous symmetry breaking of arbitrage," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 391(11), pages 3206-3218.
  8. D. Sornette, 2000. ""Slimming" of power law tails by increasing market returns," Papers cond-mat/0010112, arXiv.org, revised Sep 2001.
  9. W. -X. Zhou & D. Sornette, 2002. "Evidence of a Worldwide Stock Market Log-Periodic Anti-Bubble Since Mid-2000," Papers cond-mat/0212010, arXiv.org, revised Aug 2003.
  10. Fry, J. M., 2009. "Bubbles and contagion in English house prices," MPRA Paper 17687, University Library of Munich, Germany.
  11. Fry, J. M., 2010. "Gaussian and non-Gaussian models for financial bubbles via econophysics," MPRA Paper 27307, University Library of Munich, Germany.

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