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Are financial crashes predictable

By Laurent Laloux, Marc Potters, Rama Cont and Jean-pierre Aguilar


We critically review recent claims that financial crashes can be predicted using the idea of log-periodic oscillations or by other methods inspired by the physics of critical phenomena. In particular, the October 1997 ‘correction ’ does not appear to be the accumulation point of a geometric series of local minima. It is rather tempting to see financial crashes as the analogue of critical points in statistical mechanics, where the response to a small external perturbation becomes infinite, because all the subparts of the system respond cooperatively (a large proportion of the actors in a market decide simultaneously to sell their stocks). If one furthermore assumes that ‘log-periodic’ corrections (for which there is a recent upsurge of interest [1]) are present, then one can try to use the oscillations seen on markets as precursors to predict the crash time tc, which is the point where these oscillations accumulate. Intriguing hints supporting this scenario have been reported i

Year: 1999
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