Significance of log-periodic precursors to financial crashes

We clarify the status of log-periodicity associated with speculative bubbles preceding financial crashes. In particular, we address Feigenbaum's [2001] criticism and show how it can be rebuked. Feigenbaum's main result is as follows: ``the hypothesis that the log-periodic component is present in the data cannot be rejected at the 95% confidence level when using all the data prior to the 1987 crash; however, it can be rejected by removing the last year of data.'' (e.g., by removing 15% of the data closest to the critical point). We stress that it is naive to analyze a critical point phenomenon, i.e., a power law divergence, reliably by removing the most important part of the data closest to the critical point. We also present the history of log-periodicity in the present context explaining its essential features and why it may be important. We offer an extension of the rational expectation bubble model for general and arbitrary risk-aversion within the general stochastic discount factor theory. We suggest guidelines for using log-periodicity and explain how to develop and interpret statistical tests of log-periodicity. We discuss the issue of prediction based on our results and the evidence of outliers in the distribution of drawdowns. New statistical tests demonstrate that the 1% to 10% quantile of the largest events of the population of drawdowns of the Nasdaq composite index and of the Dow Jones Industrial Average index belong to a distribution significantly different from the rest of the population. This suggests that very large drawdowns result from an amplification mechanism that may make them more predictable than smaller market moves.Comment: Latex document of 38 pages including 16 eps figures and 3 tables, in press in Quantitative Financ

Yambo: an \textit{ab initio} tool for excited state calculations

{\tt yambo} is an {\it ab initio} code for calculating quasiparticle energies and optical properties of electronic systems within the framework of many-body perturbation theory and time-dependent density functional theory. Quasiparticle energies are calculated within the $GW$ approximation for the self-energy. Optical properties are evaluated either by solving the Bethe--Salpeter equation or by using the adiabatic local density approximation. {\tt yambo} is a plane-wave code that, although particularly suited for calculations of periodic bulk systems, has been applied to a large variety of physical systems. {\tt yambo} relies on efficient numerical techniques devised to treat systems with reduced dimensionality, or with a large number of degrees of freedom. The code has a user-friendly command-line based interface, flexible I/O procedures and is interfaced to several publicly available density functional ground-state codes.Comment: This paper describes the features of the Yambo code, whose source is available under the GPL license at www.yambo-code.or

Decomposing Integrated Assessment Climate Change

We present a decomposition approach for integrated assessment modeling of climate policy based on a linear approximation of the climate system. Our objective is to demonstrate the usefulness of decomposition for integrated assessment models posed in a complementarity format. First, the complementarity formulation cum decomposition permits a precise representation of post-terminal damages thereby substantially reducing the model horizon required to produce an accurate approximation of the infinite-horizon equilibrium. Second, and central to the economic assessment of climate policies, the complementarity approach provides a means of incorporating second-best effects that are not easily represented in an optimization model. --integrated assessment,decomposition,terminal constraints,optimal taxation