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A finite-time singularity in the dynamics of the US equity market: Will the US equity market eventually collapse?

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  • Grobys, Klaus

Abstract

Fitting Dow Jones 30 index data for the 1790–1999 period into a log-periodic power-law singularity (LPPLS) model, the seminal paper by Johansen and Sornette (2001) was the first to show that the US equity growth rate is accelerating such that the market is growing as a power law toward a spontaneous singularity. Their model suggests that the US equity market will reach this critical point in the year 2052 ± 10 years, signaling an abrupt transition to a new regime. This study re-examines this important issue using (i) a novel approach to calibrate the LPPLS model and (ii) a different data set including >20 years of additional data. The extended data account for the dot.com bubble burst (2000), the Global Financial Crisis period (2008–2009), the COVID−19 crisis (2020−2022), and the ongoing Russian–Ukrainian war (starting in 2022), which are all events with severe consequences for the global economy. The calibrated LPPLS model suggests that the US equity market will reach a singularity condition by June 2050.

Suggested Citation

  • Grobys, Klaus, 2023. "A finite-time singularity in the dynamics of the US equity market: Will the US equity market eventually collapse?," International Review of Financial Analysis, Elsevier, vol. 89(C).
    • Handle: RePEc:eee:finana:v:89:y:2023:i:c:s1057521923003034
    DOI: 10.1016/j.irfa.2023.102787
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    References listed on IDEAS

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    1. Zhang, Qunzhi & Sornette, Didier & Balcilar, Mehmet & Gupta, Rangan & Ozdemir, Zeynel Abidin & Yetkiner, Hakan, 2016. "LPPLS bubble indicators over two centuries of the S&P 500 index," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 126-139.
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    2. Huang, Wenyang & Wang, Yizhi, 2024. "Identifying price bubbles in global carbon markets: Evidence from the SADF test, GSADF test and LPPLS method," Energy Economics, Elsevier, vol. 134(C).

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    More about this item

    Keywords

    Finite-time singularity; Financial markets; Log-period power laws; Power laws; S&P 500; Singularity;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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