IDEAS home Printed from https://ideas.repec.org/p/arx/papers/cond-mat-0004001.html
   My bibliography  Save this paper

Stock Market Speculation: Spontaneous Symmetry Breaking of Economic Valuation

Author

Listed:
  • D. Sornette

    (UCLA and CNRS-University of Nice)

Abstract

Firm foundation theory estimates a security's firm fundamental value based on four determinants: expected growth rate, expected dividend payout, the market interest rate and the degree of risk. In contrast, other views of decision-making in the stock market, using alternatives such as human psychology and behavior, bounded rationality, agent-based modeling and evolutionary game theory, expound that speculative and crowd behavior of investors may play a major role in shaping market prices. Here, we propose that the two views refer to two classes of companies connected through a ``phase transition''. Our theory is based on 1) the identification of the fundamental parity symmetry of prices ($p \to -p$), which results from the relative direction of payment flux compared to commodity flux and 2) the observation that a company's risk-adjusted growth rate discounted by the market interest rate behaves as a control parameter for the observable price. We find a critical value of this control parameter at which a spontaneous symmetry-breaking of prices occurs, leading to a spontaneous valuation in absence of earnings, similarly to the emergence of a spontaneous magnetization in Ising models in absence of a magnetic field. The low growth rate phase is described by the firm foundation theory while the large growth rate phase is the regime of speculation and crowd behavior. In practice, while large ``finite-time horizon'' effects round off the predicted singularities, our symmetry-breaking speculation theory accounts for the apparent over-pricing and the high volatility of fast growing companies on the stock markets.

Suggested Citation

  • D. Sornette, 2000. "Stock Market Speculation: Spontaneous Symmetry Breaking of Economic Valuation," Papers cond-mat/0004001, arXiv.org.
  • Handle: RePEc:arx:papers:cond-mat/0004001
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/cond-mat/0004001
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sornette, Didier, 1998. "Linear stochastic dynamics with nonlinear fractal properties," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 250(1), pages 295-314.
    2. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
    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. Pawe{l} Sieczka & Didier Sornette & Janusz A. Ho{l}yst, 2010. "The Lehman Brothers Effect and Bankruptcy Cascades," Papers 1002.1070, arXiv.org, revised Sep 2011.
    2. Jaehyung Choi, 2011. "Spontaneous symmetry breaking of arbitrage," Papers 1107.5122, arXiv.org, revised Apr 2012.
    3. Sornette, D., 2002. "“Slimming” of power-law tails by increasing market returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 309(3), pages 403-418.
    4. 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.
    5. D. Sornette, 2014. "Physics and Financial Economics (1776-2014): Puzzles, Ising and Agent-Based models," Papers 1404.0243, arXiv.org.
    6. Didier SORNETTE, 2014. "Physics and Financial Economics (1776-2014): Puzzles, Ising and Agent-Based Models," Swiss Finance Institute Research Paper Series 14-25, Swiss Finance Institute.
    7. Qi Zhang & Yi Hu & Jianbin Jiao & Shouyang Wang, 2024. "Assessing the extent and persistence of major crisis events in the crude oil market and economy: evidence from the past 30 years," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-17, December.
    8. D. Sornette, 2000. ""Slimming" of power law tails by increasing market returns," Papers cond-mat/0010112, arXiv.org, revised Sep 2001.
    9. MITRACHE, Mihai-Andrei & BOITOUT, Nicolas, 2017. "Tracking Financial Bubbles On Romania Stock Market," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 21(1), pages 41-62.
    10. Choi, Jaehyung, 2012. "Spontaneous symmetry breaking of arbitrage," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(11), pages 3206-3218.
    11. Jaehyung Choi, 2012. "Physical approach to price momentum and its application to momentum strategy," Papers 1208.2775, arXiv.org, revised Aug 2014.
    12. 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.
    13. Halperin, Igor & Dixon, Matthew, 2020. "“Quantum Equilibrium-Disequilibrium”: Asset price dynamics, symmetry breaking, and defaults as dissipative instantons," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 537(C).
    14. Choi, Jaehyung, 2014. "Physical approach to price momentum and its application to momentum strategy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 415(C), pages 61-72.

    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. John Haltiwanger & Scott Schuh, 1999. "Gross job flows between plants and industries," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-64.
    2. Christian Groth & Karl-Josef Koch & Thomas Steger, 2006. "Rethinking the Concept of Long-Run Economic Growth," CESifo Working Paper Series 1701, CESifo.
    3. Smulders, Sjak & Gradus, Raymond, 1996. "Pollution abatement and long-term growth," European Journal of Political Economy, Elsevier, vol. 12(3), pages 505-532, November.
    4. Andersen, Torben M., 2005. "Product market integration, wage dispersion and unemployment," Labour Economics, Elsevier, vol. 12(3), pages 379-406, June.
    5. Radwanski, Juliusz, 2020. "On the Purchasing Power of Money in an Exchange Economy," MPRA Paper 104244, University Library of Munich, Germany.
    6. repec:hal:wpspec:info:hdl:2441/2961 is not listed on IDEAS
    7. Loewy, Michael B., 1995. "Equilibrium policy with dynamically naive agents," Journal of Macroeconomics, Elsevier, vol. 17(2), pages 319-331.
    8. Picard, Pierre M. & Toulemonde, Eric, 2006. "Firms agglomeration and unions," European Economic Review, Elsevier, vol. 50(3), pages 669-694, April.
    9. Torben M. Andersen, 2003. "Wage formation and European integration," European Economy - Economic Papers 2008 - 2015 188, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    10. Lin, Hsin-Yi & Chu, Hao-Pang, 2013. "Are fiscal deficits inflationary?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 214-233.
    11. Frederick Ploeg & Aart Zeeuw, 1992. "International aspects of pollution control," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 2(2), pages 117-139, March.
    12. Yang Zaigui, 2005. "Pay-As-You-Go Public Pension Systems: Two-sided Altruism and Endogenous Growth," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 1(1), pages 1-13, June.
    13. Klaus Reiner Schenk-Hopp�, "undated". "Economic Growth and Business Cycles: A Critical Comment on Detrending Time Series (Revised Version)," IEW - Working Papers 054, Institute for Empirical Research in Economics - University of Zurich.
    14. van de Klundert, Theo & Smulders, Sjak, 1995. "Strategies for Growth in a Macroeconomic Setting," The Manchester School of Economic & Social Studies, University of Manchester, vol. 63(4), pages 388-411, December.
    15. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669, Elsevier.
    16. Boyer, Robert, 1992. "La crise de la macroéconomie, une conséquence de la méconnaissance des institutions?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 68(1), pages 43-68, mars et j.
    17. van der Ploeg, F., 1989. "Risk aversion, intertemporal substitution and consumption : The CARA-LQ problem," Discussion Paper 1989-53, Tilburg University, Center for Economic Research.
    18. Mostafavi, Moeen & Shakouri G., Hamed & Fatehi, Ali-Reza, 2010. "Why the determinacy condition is a weak criterion in rational expectations models," MPRA Paper 28320, University Library of Munich, Germany.
    19. Oscar Bajo-Rubio & Carmen Diaz-Roldan, 2005. "Optimal endowments of public capital: An empirical analysis for the Spanish regions," Regional Studies, Taylor & Francis Journals, vol. 39(3), pages 297-304.
    20. Di Giannatale, Sonia & Roa, María José, 2016. "Formal Saving in Developing Economies: Barriers, Interventions, and Effects," IDB Publications (Working Papers) 8107, Inter-American Development Bank.
    21. Gaia Garino & Lucio Sarno, 2004. "Speculative Bubbles in U.K. House Prices: Some New Evidence," Southern Economic Journal, John Wiley & Sons, vol. 70(4), pages 777-795, April.

    More about this item

    Statistics

    Access and download statistics

    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:arx:papers:cond-mat/0004001. 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: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    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.