Bubbles and crashes in finance: A phase transition from random to deterministic behaviour in prices
AbstractWe develop a rational expectations model of financial bubbles and study ways in which a generic risk-return interplay is incorporated into prices. We retain the interpretation of the leading Johansen-Ledoit-Sornette model, namely, that the price must rise prior to a crash in order to compensate a representative investor for the level of risk. This is accompanied, in our stochastic model, by an illusion of certainty as described by a decreasing volatility function. As the volatility function goes to zero, crashes can be seen to represent a phase transition from stochastic to deterministic behaviour in prices.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 24778.
Date of creation: 03 Sep 2010
Date of revision:
financial crashes; super-exponential growth; illusion of certainty; housing-bubble;
Other versions of this item:
- John FRY, 2010. "Bubbles And Crashes In Finance: A Phase Transition From Random To Deterministic Behaviour In Prices," Journal of Applied Research in Finance Bi-Annually, ASERS Publishing, vol. 0(2), pages 131-137, December.
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- C00 - Mathematical and Quantitative Methods - - General - - - General
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-11 (All new papers)
- NEP-ORE-2010-09-11 (Operations Research)
- NEP-UPT-2010-09-11 (Utility Models & Prospect Theory)
- NEP-URE-2010-09-11 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- 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.
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