Physics – Condensed Matter – Statistical Mechanics
Scientific paper
2003-11-05
Physica A 337 (3-4), 565-585 (2004)
Physics
Condensed Matter
Statistical Mechanics
12 pages + 9 figures + 9 tables
Scientific paper
10.1016/j.physa.2004.01.054
Using a recently introduced rational expectation model of bubbles, based on the interplay between stochasticity and positive feedbacks of prices on returns and volatility, we develop a new methodology to test how this model classifies 9 time series that have been previously considered as bubbles ending in crashes. The model predicts the existence of two anomalous behaviors occurring simultaneously: (i) super-exponential price growth and (ii) volatility growth, that we refer to as the ``fearful singular bubble'' regime. Out of the 9 time series, we find that 5 pass our tests and can be characterized as ``fearful singular bubbles.'' The 4 other cases are the information technology Nasdaq bubble and three bubbles of the Hang Seng index ending in crashes in 1987, 1994 and 1997. According to our analysis, these four bubbles have developed with essentially no significant increase of their volatility. This paper thus proposes that speculative bubbles ending in crashes form two groups hitherto unrecognized, namely those accompanied by increasing volatility (reflecting increasing risk perception) and those without change of volatility (reflecting an absence of risk perception).
Andersen Jorgen Vitting
Sornette Didier
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