IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/47052.html
   My bibliography  Save this paper

Bubbles, shocks and elementary technical trading strategies

Author

Listed:
  • Fry, John

Abstract

In this paper we provide a unifying framework for a set of seemingly disparate models for bubbles, shocks and elementary technical trading strategies in financial markets. Markets operate by balancing intrinsic levels of risk and return. This seemingly simple observation is commonly over-looked by academics and practitioners alike. Our model shares its origins in statistical physics with others. However, under our approach, changes in market regime can be explicitly shown to represent a phase transition from random to deterministic behaviour in prices. This structure leads to an improved physical and econometric model. We develop models for bubbles, shocks and elementary technical analysis strategies. We apply our model to real-estate bubbles and to the on-going Eurozone crisis. We close by comparing the results of our mathematical model with the results of qualitative analyses from the finance literature.

Suggested Citation

  • Fry, John, 2013. "Bubbles, shocks and elementary technical trading strategies," MPRA Paper 47052, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:47052
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/47052/1/MPRA_paper_47052.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. George Chang & James Feigenbaum, 2006. "A Bayesian analysis of log-periodic precursors to financial crashes," Quantitative Finance, Taylor & Francis Journals, vol. 6(1), pages 15-36.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    3. John Y. Campbell & John H. Cochrane, 2000. "Explaining the Poor Performance of Consumption‐based Asset Pricing Models," Journal of Finance, American Finance Association, vol. 55(6), pages 2863-2878, December.
    4. Cheol‐Ho Park & Scott H. Irwin, 2007. "What Do We Know About The Profitability Of Technical Analysis?," Journal of Economic Surveys, Wiley Blackwell, vol. 21(4), pages 786-826, September.
    5. Zhou, Wei-Xing & Sornette, Didier, 2008. "Analysis of the real estate market in Las Vegas: Bubble, seasonal patterns, and prediction of the CSW indices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(1), pages 243-260.
    6. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    7. Lui, Yu-Hon & Mole, David, 1998. "The use of fundamental and technical analyses by foreign exchange dealers: Hong Kong evidence," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 535-545, June.
    8. Petr Geraskin & Dean Fantazzini, 2013. "Everything you always wanted to know about log-periodic power laws for bubble modeling but were afraid to ask," The European Journal of Finance, Taylor & Francis Journals, vol. 19(5), pages 366-391, May.
    9. J. A. Feigenbaum, 2001. "More on a statistical analysis of log-periodic precursors to financial crashes," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 527-532.
    10. Zhou, Wei-Xing & Sornette, Didier, 2009. "A case study of speculative financial bubbles in the South African stock market 2003–2006," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(6), pages 869-880.
    11. Heping Pan & Didier Sornette & Kenneth Kortanek, 2006. "Intelligent finance—an emerging direction," Quantitative Finance, Taylor & Francis Journals, vol. 6(4), pages 273-277.
    12. Sornette, Didier & Zhou, Wei-Xing, 2006. "Predictability of large future changes in major financial indices," International Journal of Forecasting, Elsevier, vol. 22(1), pages 153-168.
    13. J.A. Feigenbaum, 2001. "A statistical analysis of log-periodic precursors to financial crashes-super-," Quantitative Finance, Taylor & Francis Journals, vol. 1(3), pages 346-360, March.
    14. Walid, Chkili & Chaker, Aloui & Masood, Omar & Fry, John, 2011. "Stock market volatility and exchange rates in emerging countries: A Markov-state switching approach," Emerging Markets Review, Elsevier, vol. 12(3), pages 272-292, September.
    15. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    16. Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2000. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," Journal of Finance, American Finance Association, vol. 55(4), pages 1705-1765, August.
    17. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
    18. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
    19. Jiang, Zhi-Qiang & Zhou, Wei-Xing & Sornette, Didier & Woodard, Ryan & Bastiaensen, Ken & Cauwels, Peter, 2010. "Bubble diagnosis and prediction of the 2005-2007 and 2008-2009 Chinese stock market bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 149-162, June.
    20. De Paoli, Bianca & Zabczyk, Pawel, 2012. "Why Do Risk Premia Vary Over Time? A Theoretical Investigation Under Habit Formation," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S2), pages 252-266, September.
    21. repec:bla:jfinan:v:55:y:2000:i:4:p:1705-1770 is not listed on IDEAS
    22. Anders Johansen & Didier Sornette, 2010. "Shocks, Crashes and Bubbles in Financial Markets," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 53(2), pages 201-253.
    23. Sornette, D & Helmstetter, A, 2003. "Endogenous versus exogenous shocks in systems with memory," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 318(3), pages 577-591.
    24. Anders Johansen & Olivier Ledoit & Didier Sornette, 2000. "Crashes As Critical Points," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 219-255.
    25. Jeong-Ryeol Kurz-Kim, 2012. "Early warning indicator for financial crashes using the log periodic power law," Applied Economics Letters, Taylor & Francis Journals, vol. 19(15), pages 1465-1469, October.
    26. George Chang & James Feigenbaum, 2008. "Detecting log-periodicity in a regime-switching model of stock returns," Quantitative Finance, Taylor & Francis Journals, vol. 8(7), pages 723-738.
    27. Fabrizio Lillo & Rosario N. Mantegna, 2001. "Power law relaxation in a complex system: Omori law after a financial market crash," Papers cond-mat/0111257, arXiv.org, revised Jun 2003.
    28. Carol L. Osler, 2000. "Support for resistance: technical analysis and intraday exchange rates," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-68.
    29. Bouchaud,Jean-Philippe & Potters,Marc, 2003. "Theory of Financial Risk and Derivative Pricing," Cambridge Books, Cambridge University Press, number 9780521819169.
    30. Yan, Wanfeng & Woodard, Ryan & Sornette, Didier, 2012. "Diagnosis and prediction of rebounds in financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(4), pages 1361-1380.
    31. David S. Br�e & Damien Challet & Pier Paolo Peirano, 2013. "Prediction accuracy and sloppiness of log-periodic functions," Quantitative Finance, Taylor & Francis Journals, vol. 13(2), pages 275-280, January.
    32. A. I. Saichev & D. Sornette, 2010. "Generation-by-generation dissection of the response function in long memory epidemic processes," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 75(3), pages 343-355, June.
    33. David S. Bree & Nathan Lael Joseph, 2010. "Testing for financial crashes using the Log Periodic Power Law mode," Papers 1002.1010, arXiv.org, revised Apr 2013.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cheah, Eng-Tuck & Fry, John, 2015. "Speculative bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin," Economics Letters, Elsevier, vol. 130(C), pages 32-36.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fry, John, 2012. "Exogenous and endogenous crashes as phase transitions in complex financial systems," MPRA Paper 36202, University Library of Munich, Germany.
    2. John Fry & McMillan David, 2015. "Stochastic modelling for financial bubbles and policy," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 1002152-100, December.
    3. Fry, John & Cheah, Eng-Tuck, 2016. "Negative bubbles and shocks in cryptocurrency markets," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 343-352.
    4. Sornette, Didier & Woodard, Ryan & Yan, Wanfeng & Zhou, Wei-Xing, 2013. "Clarifications to questions and criticisms on the Johansen–Ledoit–Sornette financial bubble model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4417-4428.
    5. Wosnitza, Jan Henrik & Denz, Cornelia, 2013. "Liquidity crisis detection: An application of log-periodic power law structures to default prediction," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(17), pages 3666-3681.
    6. Wosnitza, Jan Henrik & Leker, Jens, 2014. "Can log-periodic power law structures arise from random fluctuations?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 401(C), pages 228-250.
    7. Filimonov, V. & Sornette, D., 2013. "A stable and robust calibration scheme of the log-periodic power law model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(17), pages 3698-3707.
    8. Petr Geraskin & Dean Fantazzini, 2013. "Everything you always wanted to know about log-periodic power laws for bubble modeling but were afraid to ask," The European Journal of Finance, Taylor & Francis Journals, vol. 19(5), pages 366-391, May.
    9. Fantazzini, Dean, 2016. "The oil price crash in 2014/15: Was there a (negative) financial bubble?," Energy Policy, Elsevier, vol. 96(C), pages 383-396.
    10. Lin, L. & Ren, R.E. & Sornette, D., 2014. "The volatility-confined LPPL model: A consistent model of ‘explosive’ financial bubbles with mean-reverting residuals," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 210-225.
    11. Vakhtina, Elena & Wosnitza, Jan Henrik, 2015. "Capital market based warning indicators of bank runs," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 417(C), pages 304-320.
    12. Fantazzini, Dean & Nigmatullin, Erik & Sukhanovskaya, Vera & Ivliev, Sergey, 2016. "Everything you always wanted to know about bitcoin modelling but were afraid to ask. I," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 44, pages 5-24.
    13. Fry, J. M., 2010. "Gaussian and non-Gaussian models for financial bubbles via econophysics," MPRA Paper 27307, University Library of Munich, Germany.
    14. Kristoffer Pons Bertelsen, 2019. "Comparing Tests for Identification of Bubbles," CREATES Research Papers 2019-16, Department of Economics and Business Economics, Aarhus University.
    15. Papastamatiou, Konstantinos & Karakasidis, Theodoros, 2022. "Bubble detection in Greek Stock Market: A DS-LPPLS model approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 587(C).
    16. Wanfeng Yan & Edgar van Tuyll van Serooskerken, 2015. "Forecasting Financial Extremes: A Network Degree Measure of Super-Exponential Growth," PLOS ONE, Public Library of Science, vol. 10(9), pages 1-15, September.
    17. Fantazzini, Dean & Nigmatullin, Erik & Sukhanovskaya, Vera & Ivliev, Sergey, 2017. "Everything you always wanted to know about bitcoin modelling but were afraid to ask. Part 2," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 45, pages 5-28.
    18. Brée, David S. & Joseph, Nathan Lael, 2013. "Testing for financial crashes using the Log Periodic Power Law model," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 287-297.
    19. Li Lin & Didier Sornette, 2015. ""Speculative Influence Network" during financial bubbles: application to Chinese Stock Markets," Papers 1510.08162, arXiv.org.
    20. Lukas Menkhoff & Mark P. Taylor, 2007. "The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 936-972, December.

    More about this item

    Keywords

    Bubbles; Crashes; Shocks; Technical Analysis; Cycles;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:47052. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.