| Wheii.com | Understand Change > Be in the Know

Main menu

SITE FEED

RSS

ARCHIVE

September 2002October 2002November 2002December 2002January 2003February 2003March 2003April 2003May 2003June 2003July 2003August 2003September 2003October 2003November 2003December 2003January 2004February 2004March 2004May 2004June 2004July 2004August 2004September 2004October 2004November 2004December 2004January 2005February 2005March 2005April 2005May 2005June 2005July 2005August 2005September 2005October 2005November 2005December 2005January 2006February 2006March 2006April 2006May 2006June 2006July 2006August 2006October 2006November 2006December 2006January 2007February 2007April 2007May 2007June 2007July 2007September 2007October 2007December 2007January 2008February 2008March 2008April 2008June 2008September 2008October 2008November 2008December 2008January 2009March 2009April 2009May 2009July 2009August 2009September 2009

SUBSCRIBE

Thursday, September 10, 2009
Posted by Roberto
3:13 PM 0 comments

BUBBLE DIAGNOSIS AND PREDICTION

Econophysicist Predicts Date of Chinese Stock Market Collapse:

Back in July, econophysicist Didier Sornette at the Swiss Federal Institute of Technology in Zurich and a few pals predicted the impending collapse of the Shanghai Composite stock market index.

Their evidence was that the index had been growing at a faster than exponential rate, which was clearly measurable and obviously unsustainable.

At the beginning of August, the Shanghai Composite dropped by about 20 per cent!

Yesterday, Sornette and co publish the method they use to make their prediction.
Their method is a synthesis of ideas from the economic theory of rational expectation bubbles, from the imitation and herding behaviour of investors and traders and from the mathematical and statistical physics of bifurcations and phase transitions.

From this, they say they have discovered an unambiguous signature of a bubble market about to collapse in the form of super-exponential growth decorated with logarithmic oscillations as in the diagram above.

Sornette says he has used this method to predict the collapse of several bubbles in the last few years, including the collapse of the oil bubble last year and the US housing market in 2006.

That's important work which could have a profound impact on economic models. If Sornette and his colleagues have put their money where there mouths are, they ought to be super rich by now.

One interesting aspect of Sornette's predictions is that the team claim that they will not affect the market in a way that changes the forecast.

"Even in the presence of investors fully informed of the presence of the bubble and with the knowledge of its end date, it remains rational to stay invested in the market to garner very large returns since the risk of a crash remains finite."

Of course, the end of a bubble doesn't always imply a crash, just a change from super exponential growth to some other kind of market dynamics.

But if Sornette's forecasts prove reliable, the herding behaviour of traders and investors makes it seem inevitable that they will trigger crashes. If that happens, they will become self-fulfilling prophecies that will generate some interesting dilemmas for traders and regulators alike.

Sources:
Econophysicist Predicts Date of Chinese Stock Market Collapse
Bubble Diagnosis and Prediction of the Chinese stock market bubbles
Labels: chinese stock market bubbles