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Real-Time Prediction and Post-Mortem Analysis of the Shanghai 2015 Stock Market Bubble and Crash

Author

Listed:
  • Didier Sornette

    (ETH Zurich and Swiss Finance Institute)

  • Guilherme Demos

    (ETH Zurich)

  • Qun Zhang

    (ETH Zurich and South China University of Technology)

  • Peter Cauwels

    (ETH Zurich)

  • Vladimir Filimonov

    (ETH Zurich)

  • Qunzhi Zhang

    (ETH Zurich)

Abstract

The authors assess the performance of the real-time diagnostic, openly presented to the public on the website of the Financial Crisis Observatory (FCO) at ETH Zurich, of the bubble regime that developed in Chinese stock markets since mid-2014 and that started to burst in June 2015. The analysis is based on (i) the economic theory of rational expectation bubbles, (ii) behavioural mechanisms of imitation and herding of investors and traders and (iii) the mathematical formulation of the Log-Periodic Power Law Singularity (LPPLS) that describes the critical approach towards a tipping point in complex systems. The authors document how the real-time predictions were presented in the automated analysis of the FCO, as well as in our monthly FCO Cockpit report of June 2015. A complementary postmortem analysis on the nature and value of the LPPLS methodology to diagnose the SSEC bubble and its termination is also given.

Suggested Citation

  • Didier Sornette & Guilherme Demos & Qun Zhang & Peter Cauwels & Vladimir Filimonov & Qunzhi Zhang, 2015. "Real-Time Prediction and Post-Mortem Analysis of the Shanghai 2015 Stock Market Bubble and Crash," Swiss Finance Institute Research Paper Series 15-31, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1531
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    Keywords

    Financial bubbles; Crashes; Probabilistic forecast; Johansen-Ledoit-Sornette model; Log-periodic power law singularity (LPPLS); Advanced warning; Chinese bubbles; Financial crisis observatory;
    All these keywords.

    JEL classification:

    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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