IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Endogenous versus Exogenous Crashes in Financial Markets

  • A. Johansen

    (Riso National Lab., Denmark)

  • D. Sornette

    (UCLA and CNRS-Univ. Nice)

Registered author(s):

    We perform an extended analysis of the distribution of drawdowns in the two leading exchange markets (US dollar against the Deutsmark and against the Yen), in the major world stock markets, in the U.S. and Japanese bond market and in the gold market, by introducing the concept of ``coarse-grained drawdowns,'' which allows for a certain degree of fuzziness in the definition of cumulative losses and improves on the statistics of our previous results on the existence of ``outliers'' or ``kings.'' Then, for each identified outlier, we check whether log-periodic power law signatures (LPPS) are present and take the existence of LPPS as the qualifying signature for an endogenous crash: this is because a drawdown outlier is seen as the end of a speculative unsustainable accelerating bubble generated endogenously. In the absence of LPPS, we are able to identify what seems to have been the relevant historical event, i.e., a new piece of information of such magnitude and impact that it is seems reasonable to attribute the crash to it, in agreement with the standard view of the efficient market hypothesis. Such drawdown outliers are classified as having an exogenous origin. Globally over all the markets analyzed, we identify 49 outliers, of which 25 are classified as endogenous, 22 as exogeneous and 2 as associated with the Japanese anti-bubble. Restricting to the world market indices, we find 31 outliers, of which 19 are endogenous, 10 are exogenous and 2 are associated with the Japanese anti-bubble. The combination of the two proposed detection techniques, one for drawdown outliers and the second for LPPS, provides a novel and systematic taxonomy of crashes further subtantiating the importance of LPPS.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://arxiv.org/pdf/cond-mat/0210509
    File Function: Latest version
    Download Restriction: no

    Paper provided by arXiv.org in its series Papers with number cond-mat/0210509.

    as
    in new window

    Length:
    Date of creation: Oct 2002
    Date of revision:
    Publication status: Published in Shocks, Crashes and Bubbles in Financial Markets, Brussels Economic Review 53 (2), 201-253 (2010)
    Handle: RePEc:arx:papers:cond-mat/0210509
    Contact details of provider: Web page: http://arxiv.org/

    References listed on IDEAS
    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.:

    as in new window
    1. D. Sornette & W. -X. Zhou, 2002. "The US 2000-2002 Market Descent: How Much Longer and Deeper?," Papers cond-mat/0209065, arXiv.org.
    2. D. Sornette & A. Helmstetter, 2002. "Endogeneous Versus Exogeneous Shocks in Systems with Memory," Papers cond-mat/0206047, arXiv.org.
    3. Sornette, Didier & Johansen, Anders, 1998. "A hierarchical model of financial crashes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 261(3), pages 581-598.
    4. Sanford J. Grossman & Zhongquan Zhou, 1993. "Optimal Investment Strategies For Controlling Drawdowns," Mathematical Finance, Wiley Blackwell, vol. 3(3), pages 241-276.
    5. Coe, Patrick J, 2002. "Financial Crisis and the Great Depression: A Regime Switching Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 76-93, February.
    6. A. Johansen & D. Sornette, 1998. "Stock market crashes are outliers," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 1(2), pages 141-143, January.
    7. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    8. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1988. "What Moves Stock Prices?," NBER Working Papers 2538, National Bureau of Economic Research, Inc.
    9. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, June.
    10. Fabrizio Lillo & Rosario N. Mantegna, 2000. "Symmetry alteration of ensemble return distribution in crash and rally days of financial markets," Papers cond-mat/0002438, arXiv.org.
    11. 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.
    12. D. Sornette & Y. Malevergne & J. F. Muzy, 2002. "Volatility fingerprints of large shocks: Endogeneous versus exogeneous," Papers cond-mat/0204626, arXiv.org.
    13. D. Sornette & A. Johansen, 2001. "Significance of log-periodic precursors to financial crashes," Quantitative Finance, Taylor & Francis Journals, vol. 1(4), pages 452-471.
    14. D. Sornette & A. Johansen, 2001. "Significance of log-periodic precursors to financial crashes," Papers cond-mat/0106520, arXiv.org.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:arx:papers:cond-mat/0210509. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.