IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v332y2004icp412-440.html
   My bibliography  Save this article

Evidence of fueling of the 2000 new economy bubble by foreign capital inflow: implications for the future of the US economy and its stock market

Author

Listed:
  • Sornette, Didier
  • Zhou, Wei-Xing

Abstract

Previous analyses of a large ensemble of stock markets have demonstrated that a log-periodic power law (LPPL) behavior of the prices constitutes a qualifying signature of speculative bubbles that often land with a crash. We detect such a LPPL signature in the foreign capital inflow during the bubble on the US markets culminating in March 2000. We detect a weak synchronization and lag with the NASDAQ LPPL pattern. We propose to rationalize these observations by the existence of positive feedback loops between market-appreciation/increased-spending/increased-deficit-of-balance-of-payment/larger-foreign-surplus/increased-foreign-capital-inflows and so on. Our analysis suggests that foreign capital inflow has been following rather than causing the bubble.

Suggested Citation

  • Sornette, Didier & Zhou, Wei-Xing, 2004. "Evidence of fueling of the 2000 new economy bubble by foreign capital inflow: implications for the future of the US economy and its stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 332(C), pages 412-440.
    • Handle: RePEc:eee:phsmap:v:332:y:2004:i:c:p:412-440
    DOI: 10.1016/j.physa.2003.10.010
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437103009269
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2003.10.010?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Didier Sornette & Wei-Xing Zhou, 2002. "The US 2000-2002 market descent: How much longer and deeper?," Quantitative Finance, Taylor & Francis Journals, vol. 2(6), pages 468-481.
    2. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    3. D. Sornette & A. Johansen, 2001. "Significance of log-periodic precursors to financial crashes," Quantitative Finance, Taylor & Francis Journals, vol. 1(4), pages 452-471.
    4. Adam, M C & Szafarz, A, 1992. "Speculative Bubbles and Financial Markets," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 626-640, October.
    5. Meese, Richard A, 1986. "Testing for Bubbles in Exchange Markets: A Case of Sparkling Rates?," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 345-373, April.
    6. Michael P Dooley & Carl E Walsh, 1999. "Academic Views of Capital Flows: An Expanding Universe," RBA Annual Conference Volume (Discontinued), in: David Gruen & Luke Gower (ed.),Capital Flows and the International Financial System, Reserve Bank of Australia.
    7. Zhou, Wei-Xing & Sornette, Didier, 2003. "2000–2003 real estate bubble in the UK but not in the USA," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 329(1), pages 249-263.
    8. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, Decembrie.
    9. Eric Ghysels & Junghoon Seon, 2000. "The Asian Financial Crisis: The Role of Derivative Securities Trading and Foreign Investors," CIRANO Working Papers 2000s-11, CIRANO.
    10. Wei-Xing Zhou & Didier Sornette & Vladilen Pisarenko, 2003. "New Evidence Of Discrete Scale Invariance In The Energy Dissipation Of Three-Dimensional Turbulence: Correlation Approach And Direct Spectral Detection," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 14(04), pages 459-470.
    11. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-930, September.
    12. Albuquerque, Rui & Loayza, Norman & Serven, Luis, 2005. "World market integration through the lens of foreign direct investors," Journal of International Economics, Elsevier, vol. 66(2), pages 267-295, July.
    13. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    14. Cédric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 9(Jan).
    15. Yi-Cheng Zhang, 1999. "Toward a Theory of Marginally Efficient Markets," Papers cond-mat/9901243, arXiv.org.
    16. Anders Johansen & Didier Sornette, 1999. "Critical Crashes," Papers cond-mat/9901035, arXiv.org.
    17. Zhou, Wei-Xing & Sornette, Didier, 2003. "Evidence of a worldwide stock market log-periodic anti-bubble since mid-2000," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 330(3), pages 543-583.
    18. Dahlquist, Magnus & Robertsson, Göran, 2001. "Foreigners Trading and Price Effects Across Firms," CEPR Discussion Papers 3033, C.E.P.R. Discussion Papers.
    19. Woo, Wing Thye, 1987. "Some Evidence of Speculative Bubbles in the Foreign Exchange Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 499-514, November.
    20. Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November.
    21. Vandewalle, N. & Boveroux, Ph. & Minguet, A. & Ausloos, M., 1998. "The crash of October 1987 seen as a phase transition: amplitude and universality," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 255(1), pages 201-210.
    22. Wei-Xing Zhou & Didier Sornette, 2003. "Nonparametric Analyses Of Log-Periodic Precursors To Financial Crashes," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 14(08), pages 1107-1125.
    23. Anders Johansen & Didier Sornette, 2001. "Bubbles And Anti-Bubbles In Latin-American, Asian And Western Stock Markets: An Empirical Study," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 4(06), pages 853-920.
    24. D. Sornette & A. Johansen, 2001. "Significance of log-periodic precursors to financial crashes," Papers cond-mat/0106520, arXiv.org.
    25. Martin N. Baily, 2001. "Macroeconomic implications of the new economy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 201-268.
    26. Martin Neil Baily, 2001. "Macroeconomic Implications of the New Economy," Working Paper Series WP01-9, Peterson Institute for International Economics.
    27. Dahlquist, Magnus & Robertsson, Göran, 2001. "Foreigners´ Trading and Price Effects Across Firms," SIFR Research Report Series 1, Institute for Financial Research.
    28. Kilian, Lutz & Manganelli, Simone, 2003. "The Central Banker as a Risk Manager: Quantifying and Forecasting Inflation Risks," CEPR Discussion Papers 3918, C.E.P.R. Discussion Papers.
    29. Frantisek Slanina & Yi-Cheng Zhang, 1999. "Capital flow in a two-component dynamical system," Papers cond-mat/9906249, arXiv.org, revised Jun 1999.
    30. Slanina, František & Zhang, Yi-Cheng, 1999. "Capital flow in a two-component dynamical system," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 272(1), pages 257-268.
    31. Anders Johansen & Olivier Ledoit & Didier Sornette, 2000. "Crashes As Critical Points," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 219-255.
    32. Ingrid M. Werner & Linda L. Tesar, 1997. "The Internationalization of Securities Markets Since the 1987 Crash," Center for Financial Institutions Working Papers 97-55, Wharton School Center for Financial Institutions, University of Pennsylvania.
    33. W. -X. Zhou & D. Sornette, 2003. "Renormalization Group Analysis of the 2000-2002 anti-bubble in the US S&P 500 index: Explanation of the hierarchy of 5 crashes and Prediction," Papers physics/0301023, arXiv.org, revised Aug 2003.
    34. Zhang, Yi-Cheng, 1999. "Toward a theory of marginally efficient markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 269(1), pages 30-44.
    35. Camerer, Colin, 1989. "Bubbles and Fads in Asset Prices," Journal of Economic Surveys, Wiley Blackwell, vol. 3(1), pages 3-41.
    36. Anders Johansen & Didier Sornette, 2000. "The Nasdaq crash of April 2000: Yet another example of log-periodicity in a speculative bubble ending in a crash," Papers cond-mat/0004263, arXiv.org, revised May 2000.
    37. Zhou, Wei-Xing & Sornette, Didier, 2003. "Renormalization group analysis of the 2000–2002 anti-bubble in the US S&P500 index: explanation of the hierarchy of five crashes and prediction," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 330(3), pages 584-604.
    38. Wynne Godley, 2003. "The US Economy: A Changing Strategic Predicament," Economics Strategic Analysis Archive 03-3, Levy Economics Institute.
    39. Johansen, Anders & Sornette, Didier, 2001. "Finite-time singularity in the dynamics of the world population, economic and financial indices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 294(3), pages 465-502.
    40. Black, Fischer, 1986. "Noise," Journal of Finance, American Finance Association, vol. 41(3), pages 529-543, July.
    41. Wynne Godley, 1999. "Seven Unsustainable Processes: Medium-Term Prospects and Policies for the United States and the World," Economics Strategic Analysis Archive 99-10, Levy Economics Institute.
    42. Evans, George W, 1986. "A Test for Speculative Bubbles in the Sterling-Dollar Exchange Rate: 1981-84," American Economic Review, American Economic Association, vol. 76(4), pages 621-636, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhi, Tianhao & Li, Zhongfei & Jiang, Zhiqiang & Wei, Lijian & Sornette, Didier, 2019. "Is there a housing bubble in China?," Emerging Markets Review, Elsevier, vol. 39(C), pages 120-132.
    2. Zhou, Wei-Xing & Sornette, Didier, 2009. "A case study of speculative financial bubbles in the South African stock market 2003–2006," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(6), pages 869-880.
    3. Jiang, Zhi-Qiang & Zhou, Wei-Xing & Sornette, Didier & Woodard, Ryan & Bastiaensen, Ken & Cauwels, Peter, 2010. "Bubble diagnosis and prediction of the 2005-2007 and 2008-2009 Chinese stock market bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 149-162, June.
    4. Zhang, Yue-Jun & Yao, Ting, 2016. "Interpreting the movement of oil prices: Driven by fundamentals or bubbles?," Economic Modelling, Elsevier, vol. 55(C), pages 226-240.
    5. Zhou, Wei-Xing & Sornette, Didier, 2006. "Fundamental factors versus herding in the 2000–2005 US stock market and prediction," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 360(2), pages 459-482.
    6. Du, Brian & Serrano, Alejandro & Vianna, Andre, 2021. "Short-term institutions’ information advantage and overvaluation," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    7. Ravi Dhar & William Goetzmann, 2005. "Bubble Investors: What Were They Thinking?," Yale School of Management Working Papers ysm446, Yale School of Management, revised 01 Aug 2006.
    8. Harras, Georges & Sornette, Didier, 2011. "How to grow a bubble: A model of myopic adapting agents," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 137-152.
    9. Jorgen Vitting Andersen, 2003. "Could short selling make financial markets tumble?," Papers cond-mat/0308548, arXiv.org.
    10. Cheng, Fangzheng & Fan, Tijun & Fan, Dandan & Li, Shanling, 2018. "The prediction of oil price turning points with log-periodic power law and multi-population genetic algorithm," Energy Economics, Elsevier, vol. 72(C), pages 341-355.
    11. Lukas Richau & Florian Follert & Monika Frenger & Eike Emrich, 2021. "The sky is the limit?! Evaluating the existence of a speculative bubble in European football," Journal of Business Economics, Springer, vol. 91(6), pages 765-796, August.
    12. 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.
    13. Shengguo Li & Jiaqi Liu & Jichang Dong & Xuerong Li, 2021. "20 Years of Research on Real Estate Bubbles, Risk and Exuberance: A Bibliometric Analysis," Sustainability, MDPI, vol. 13(17), pages 1-24, August.
    14. Tianhao Zhi & Zhongfei Li & Zhiqiang Jiang & Lijian Wei & Didier Sornette, 2018. "Is there a housing bubble in China," Papers 1801.03678, arXiv.org.
    15. Hao Meng & Wen-Jie Xie & Wei-Xing Zhou, 2015. "Club Convergence of House Prices: Evidence from China's Ten Key Cities," Papers 1503.05550, arXiv.org.
    16. Chuliá, Helena & Guillén, Montserrat & Uribe, Jorge M., 2017. "Measuring uncertainty in the stock market," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 18-33.
    17. Didier Sornette & Ryan Woodard, 2009. "Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis," Papers 0905.0220, arXiv.org.
    18. Ravi Dhar & William Goetzmann, 2005. "Bubble Investors: What Were They Thinking?," Yale School of Management Working Papers ysm446, Yale School of Management, revised 01 Aug 2006.
    19. D. Sornette & R. Woodard, "undated". "Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis," Working Papers CCSS-09-003, ETH Zurich, Chair of Systems Design.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhou, Wei-Xing & Sornette, Didier, 2009. "A case study of speculative financial bubbles in the South African stock market 2003–2006," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(6), pages 869-880.
    2. 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.
    3. Wosnitza, Jan Henrik & Leker, Jens, 2014. "Can log-periodic power law structures arise from random fluctuations?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 401(C), pages 228-250.
    4. Leonidas Sandoval Junior & Italo De Paula Franca, 2011. "Shocks in financial markets, price expectation, and damped harmonic oscillators," Papers 1103.1992, arXiv.org, revised Sep 2011.
    5. Wosnitza, Jan Henrik & Denz, Cornelia, 2013. "Liquidity crisis detection: An application of log-periodic power law structures to default prediction," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(17), pages 3666-3681.
    6. Lin, L. & Ren, R.E. & Sornette, D., 2014. "The volatility-confined LPPL model: A consistent model of ‘explosive’ financial bubbles with mean-reverting residuals," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 210-225.
    7. A. Johansen & D. Sornette, 2002. "Endogenous versus Exogenous Crashes in Financial Markets," Papers cond-mat/0210509, arXiv.org.
    8. Sornette, Didier & Zhou, Wei-Xing, 2006. "Predictability of large future changes in major financial indices," International Journal of Forecasting, Elsevier, vol. 22(1), pages 153-168.
    9. Zhou, Wei-Xing & Sornette, Didier, 2004. "Antibubble and prediction of China's stock market and real-estate," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 337(1), pages 243-268.
    10. Wosnitza, Jan Henrik & Leker, Jens, 2014. "Why credit risk markets are predestined for exhibiting log-periodic power law structures," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 393(C), pages 427-449.
    11. Hans-Christian Graf v. Bothmer, 2003. "Significance of log-periodic signatures in cumulative noise," Papers cond-mat/0302507, arXiv.org, revised May 2003.
    12. Shu, Min & Zhu, Wei, 2020. "Detection of Chinese stock market bubbles with LPPLS confidence indicator," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 557(C).
    13. A. Corcos & J-P Eckmann & A. Malaspinas & Y. Malevergne & D. Sornette, 2002. "Imitation and contrarian behaviour: hyperbolic bubbles, crashes and chaos," Quantitative Finance, Taylor & Francis Journals, vol. 2(4), pages 264-281.
    14. Sornette, Didier & Woodard, Ryan & Zhou, Wei-Xing, 2009. "The 2006–2008 oil bubble: Evidence of speculation, and prediction," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(8), pages 1571-1576.
    15. Zhou, Wei-Xing & Sornette, Didier, 2003. "Evidence of a worldwide stock market log-periodic anti-bubble since mid-2000," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 330(3), pages 543-583.
    16. Jovanovic, Franck & Schinckus, Christophe, 2017. "Econophysics and Financial Economics: An Emerging Dialogue," OUP Catalogue, Oxford University Press, number 9780190205034, Decembrie.
    17. Zhou, Wei-Xing & Sornette, Didier, 2006. "Is there a real-estate bubble in the US?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 361(1), pages 297-308.
    18. Wei-Xing Zhou & Didier Sornette, 2003. "Nonparametric Analyses Of Log-Periodic Precursors To Financial Crashes," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 14(08), pages 1107-1125.
    19. Didier Sornette & Wei-Xing Zhou, 2003. "The US 2000-2002 market descent: clarification," Quantitative Finance, Taylor & Francis Journals, vol. 3(3), pages 39-41.
    20. Zhang, Qunzhi & Sornette, Didier & Balcilar, Mehmet & Gupta, Rangan & Ozdemir, Zeynel Abidin & Yetkiner, Hakan, 2016. "LPPLS bubble indicators over two centuries of the S&P 500 index," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 126-139.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:332:y:2004:i:c:p:412-440. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.