Why Stock Markets Crash: Critical Events in Complex Financial Systems (Princeton Science Library) - Softcover

Sornette, Didier

Softcover

ISBN 10: 0691175950 ISBN 13: 9780691175959

Verlag: Princeton University Press, 2017

Inhaltsangabe

Most attempts to explain market failures seek to pinpoint triggering mechanisms that occur hours, days, or weeks before the collapse. Sornette proposes a radically different view: the underlying cause can be sought months and even years before the abrupt, catastrophic event in the build-up of cooperative speculation, which often translates into an accelerating rise of the market price, otherwise known as a "bubble." Anchoring his sophisticated, step-by-step analysis in leading-edge physical and statistical modeling techniques, he unearths remarkable insights and some predictions--among them, that the "end of the growth era" will occur around 2050. Sornette probes major historical precedents, from the decades-long "tulip mania" in the Netherlands that wilted suddenly in 1637 to the South Sea Bubble that ended with the first huge market crash in England in 1720, to the Great Crash of October 1929 and Black Monday in 1987, to cite just a few. He concludes that most explanations other than cooperative self-organization fail to account for the subtle bubbles by which the markets lay the groundwork for catastrophe.

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Über die Autorin bzw. den Autor

Didier Sornette is professor of entrepreneurial risks at the Swiss Federal Institute of Technology in Zurich, professor of finance at the Swiss Finance Institute in Geneva, and the director of the Financial Crisis Observatory at ETH Zurich.

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"Fascinating, and mind-expanding, reading."--Robert Shiller, author of Irrational Exuberance

"Didier Sornette's insights into why markets behave as they do are fresh, productive, and provocative. This work is bound to become an important baseline for anyone trying to understand what will happen next in the stock and currency markets not only in the U.S. but in Europe and Asia as well."--Richard N. Foster, director, McKinsey & Company

"This is a most fascinating book about an intriguing but also a controversial topic. It is written by an expert in a very straightforward style and is illustrated by many clear figures. Why Stock Markets Crash will surely raise scientific interest in the emerging new field of econophysics."--Cars H. Hommes, Director of the Center for Nonlinear Dynamics in Economics and Finance, University of Amsterdam

"In turbulent times for financial markets, more books than usual are published on such subjects as financial crashes. This book is different. First, it is written by an internationally recognized expert in non-linear, complex systems. Second, it promotes some new ideas in both finance and science. In addition, it offers the general reader an insight into finance, both practical and academic, as well as some of the issues at the cutting edge of science. What more could one ask for?"--Neil F. Johnson, Department of Physics and Oxford Center for Computational Finance, Oxford University

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Why Stock Markets Crash

Critical Events in Complex Financial Systems

By Didier Sornette

PRINCETON UNIVERSITY PRESS

Copyright © 2003 Princeton University Press
All rights reserved.

ISBN: 978-0-691-17595-9

Contents

Preface to the Princeton Science Library Edition, xiii, 
Preface to the 2002 Edition, xix, 
Chapter 1 FINANCIAL CRASHES: WHAT, HOW, WHY, AND WHEN?, 3, 
Chapter 2 FUNDAMENTALS OF FINANCIAL MARKETS26, 27, 
Chapter 3 FINANCIAL CRASHES ARE "OUTLIERS", 49, 
Chapter 4 POSITIVE FEEDBACKS, 81, 
Chapter 5 MODELING FINANCIAL BUBBLES AND MARKET CRASHES, 134, 
Chapter 6 HIERARCHIES, COMPLEX FRACTAL DIMENSIONS, AND LOG-PERIODICITY, 171, 
Chapter 7 AUTOPSY OF MAJOR CRASHES: UNIVERSAL EXPONENTS AND LOG-PERIODICITY, 228, 
Chapter 8 BUBBLES, CRISES, AND CRASHES IN EMERGENT MARKETS281, 281, 
Chapter 9 PREDICTION OF BUBBLES, CRASHES, AND ANTIBUBBLES, 320, 
Chapter 10 2050: THE END OF THE GROWTH ERA?, 355, 
References, 397, 
Index, 419, 

CHAPTER 1

FINANCIAL CRASHES: WHAT, HOW, WHY, AND WHEN?

WHAT ARE CRASHES, AND WHY DO WE CARE?

Stock market crashes are momentous financial events that are fascinating to academics and practitioners alike. According to the academic world view that markets are efficient, only the revelation of a dramatic piece of information can cause a crash, yet in reality even the most thorough postmortem analyses are typically inconclusive as to what this piece of information might have been. For traders and investors, the fear of a crash is a perpetual source of stress, and the onset of the event itself always ruins the lives of some of them.

Most approaches to explaining crashes search for possible mechanisms or effects that operate at very short time scales (hours, days, or weeks at most). This book proposes a radically different view: the underlying cause of the crash will be found in the preceding months and years, in the progressively increasing build-up of market cooperativity, or effective interactions between investors, often translated into accelerating ascent of the market price (the bubble). According to this "critical" point of view, the specific manner by which prices collapsed is not the most important problem: a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. Think of a ruler held up vertically on your finger: this very unstable position will lead eventually to its collapse, as a result of a small (or an absence of adequate) motion of your hand or due to any tiny whiff of air. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary. In the same vein, the growth of the sensitivity and the growing instability of the market close to such a critical point might explain why attempts to unravel the local origin of the crash have been so diverse. Essentially, anything would work once the system is ripe. This book explores the concept that a crash has fundamentally an endogenous, or internal, origin and that exogenous, or external, shocks only serve as triggering factors. As a consequence, the origin of crashes is much more subtle than often thought, as it is constructed progressively by the market as a whole, as a self-organizing process. In this sense, the true cause of a crash could be termed a systemic instability.

Systemic instabilities are of great concern to governments, central banks, and regulatory agencies. The question that often arose in the 1990s was whether the new, globalized, information technology–driven economy had advanced to the point of outgrowing the set of rules dating from the 1950s, in effect creating the need for a new rule set for the "New Economy." Those who make this call basically point to the systemic instabilities since 1997 (or even back to Mexico's peso crisis of 1994) as evidence that the old post–World War II rule set is now antiquated, thus condemning this second great period of globalization to the same fate as the first. With the global economy appearing so fragile sometimes, how big a disruption would be needed to throw a wrench into the world's financial machinery? One of the leading moral authorities, the Basle Committee on Banking Supervision, advised that, "in handling systemic issues, it will be necessary to address, on the one hand, risks to confidence in the financial system and contagion to otherwise sound institutions, and, on the other hand, the need to minimise the distortion to market signals and discipline."

The dynamics of confidence and of contagion and decision making based on imperfect information are indeed at the core of the book and will lead us to examine the following questions. What are the mechanisms underlying crashes? Can we forecast crashes? Could we control them? Or, at least, could we have some ixnfluence on them? Do crashes point to the existence of a fundamental instability in the world financial structure? What could be changed to modify or suppress these instabilities?

THE CRASH OF OCTOBER 1987

From the market opening on October 14, 1987 through the market close on October 19, major indexes of market valuation in the United States declined by 30% or more. Furthermore, all major world markets declined substantially that month, which is itself an exceptional fact that contrasts with the usual modest correlations of returns across countries and the fact that stock markets around the world are amazingly diverse in their organization.

In local currency units, the minimum decline was in Austria (-11.4%) and the maximum was in Hong Kong (-45.8%). Out of 23 major industrial countries (Autralia, Austria, Belgium, Canada, Denmark, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom, United States), 19 had a decline greater than 20%. Contrary to common belief, the United States was not the first to decline sharply. Non-Japanese Asian markets began a severe decline on October 19, 1987, their time, and this decline was echoed first on a number of European markets, then in North American, and finally in Japan. However, most of the same markets had experienced significant but less severe declines in the latter part of the previous week. With the exception of the United States and Canada, other markets continued downward through the end of October, and some of these declines were as large as the great crash on October 19.

A lot of work has been carried out to unravel the origin(s) of the crash, notably in the properties of trading and the structure of markets; however, no clear cause has been singled out. It is noteworthy that the strong market decline during October 1987 followed what for many countries had been an unprecedented market increase during the first nine months of the year and even before. In the U.S. market, for instance, stock prices advanced 31.4% over those nine months. Some commentators have suggested that the real cause of October's decline was that overinflated prices generated a speculative bubble during the earlier period.

The main explanations people have come up with are the following.

1. Computer trading. In computer trading, also known as program trading, computers were programmed to automatically order large stock trades when certain market trends prevailed, in particular sell orders after losses. However, during the 1987 U.S. crash, other stock markets that did not use program trading also crashed, some with losses...

Details zur Ausgabe

• Verlag: Princeton University Press
• Erscheinungsdatum: 2017
• Sprache: Englisch
• ISBN 10: 0691175950
• ISBN 13: 9780691175959
• Einband: Taschenbuch
• Anzahl der Seiten: 448
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar