Are financial crashes predictable?

Europhysics Letters

Volumn 45, Issue 1, 1999, Pages 1-5

  Laloux, L ^a   Potters, M ^a   Cont, R ^a,b   Aguilar, J P ^a   Bouchaud, J P ^a,c  

^a Science and Finance 109 111 ^*  (France)

^b EPFL   (Switzerland)

^c SERVICE DE PHYSIQUE DE L ETAT CONDENSÉ   (France)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0032590158     PISSN: 02955075     EISSN: None     Source Type: Journal    
DOI: 10.1209/epl/i1999-00122-9     Document Type: Article

References (15)

1. SORNETTE D., Phys. Rep., 297 (1998).
2. SORNETTE D., JOHANSEN A. and BOUCHAUD J. P., J. Phys. I, 6 (1996) 167.
3. FEIGENBAUM J. A. and FREUND P. G. O., Int. J. Mod. Phys., 10 (1996) 3737.
4. FEIGENBAUM J. A. and FREUND P. G. O., cond-mat/9710324.
5. For a more careful analysis, see: AUSLOOS M., BOVEROUX P., MINGUET A. and VANDEWALLE N., Eur. Phys. J. B, 4 (1998) 139; their prediction was announced in the general press in Tendances, (18 sept. 1997) 26-27 and ibid (30 oct. 1997) 11.
6. For a more careful analysis, see: AUSLOOS M., BOVEROUX P., MINGUET A. and VANDEWALLE N., Eur. Phys. J. B, 4 (1998) 139; their prediction was announced in the general press in Tendances, (18 sept. 1997) 26-27 and ibid (30 oct. 1997) 11.
7. For a more careful analysis, see: AUSLOOS M., BOVEROUX P., MINGUET A. and VANDEWALLE N., Eur. Phys. J. B, 4 (1998) 139; their prediction was announced in the general press in Tendances, (18 sept. 1997) 26-27 and ibid (30 oct. 1997) 11.
8. GLUZMAN S. and YUKALOV V. I., Mod. Phys. Lett. B, 12 (1998) 75.
9. This is reported in two identical footnotes, in STAUFFER D. and SORNETTE D., Physica A, 252 (1998) 271, and again in ROEHNER B. M. and SORNETTE D, Eur. Phys. J. B, 4 (1998) 387, where a 5 to 1 reward based on the log-periodic "bet" is presented as the proof of the pudding. Under the reasonable assumption that option prices are not too far from "fair-game", this means that the market itself estimated the probability of such an adverse move to be about 20%. Indeed, the price of deep out-of-the-money puts has been very high ever since mid 1997.
10. This is reported in two identical footnotes, in STAUFFER D. and SORNETTE D., Physica A, 252 (1998) 271, and again in ROEHNER B. M. and SORNETTE D, Eur. Phys. J. B, 4 (1998) 387, where a 5 to 1 reward based on the log-periodic "bet" is presented as the proof of the pudding. Under the reasonable assumption that option prices are not too far from "fair-game", this means that the market itself estimated the probability of such an adverse move to be about 20%. Indeed, the price of deep out-of-the-money puts has been very high ever since mid 1997.
11. CHAPMAN T., Europhys. News, 29 (1998) 4; 35-36.
12. SORNETTE D., private communication to J.-P. Aguilar, May 1995.
13. To call the October 1997 turmoil a crash is furthermore unadapted, since the S&P index made a strong rebound on the following day and reached a new historical high about a month later!
14. Note that the parameter λ for the 1987 crash is calculated using the 7 (or 9) parameter fit to a full log-periodic oscillating function, while for the 1997 crash, identification of the local minima is used. Neither method works convincingly in the other case.
15. GLUZMAN S. and YUKALOV V. I., cond-mat/9803059.