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Everything You Always Wanted to Know about Log Periodic Power Laws for Bubble Modelling but Were Afraid to Ask

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  • Fantazzini, Dean
  • Geraskin, Petr

Abstract

Sornette et al. (1996), Sornette and Johansen (1997), Johansen et al. (2000) and Sornette (2003a) proposed that, prior to crashes, the mean function of a stock index price time series is characterized by a power law decorated with log-periodic oscillations, leading to a critical point that describes the beginning of the market crash. This paper reviews the original Log-Periodic Power Law (LPPL) model for financial bubble modelling, and discusses early criticism and recent generalizations proposed to answer these remarks. We show how to fit these models with alternative methodologies, together with diagnostic tests and graphical tools to diagnose financial bubbles in the making in real time. An application of this methodology to the Gold bubble which busted in December 2009 is then presented.

Suggested Citation

  • Fantazzini, Dean & Geraskin, Petr, 2011. "Everything You Always Wanted to Know about Log Periodic Power Laws for Bubble Modelling but Were Afraid to Ask," MPRA Paper 47869, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:47869
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    References listed on IDEAS

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    More about this item

    Keywords

    Log-periodic models; LPPL; Crash; Bubble; Anti-Bubble; GARCH; Forecasting; Gold; Bubble Burst; Bubble modelling; Bubble forecasting;
    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
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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