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An Econophysics Model of Financial Bubbles  [PDF]
Bodo Herzog
Natural Science (NS) , 2015, DOI: 10.4236/ns.2015.71006
Abstract: Usually financial crises go along with bubbles in asset prices, such as the housing bubble in the US in 2007. This paper attempts to build a mathematical model of financial bubbles from an econophysics, and thus a new perspective. I find that agents identify bubbles only with a time delay. Furthermore, I demonstrate that the detection of bubbles is different on either the individual or collective point of view. Second, I utilize the findings for a new definition of asset bubbles in finance. Finally, I extend the model to the study of asset price dynamics with news. In conclusion, the model provides unique insights into the properties and developments of financial bubbles.
Economic Growth with Asset Bubbles in a Small Open Economy  [PDF]
Atsushi Motohashi
Theoretical Economics Letters (TEL) , 2016, DOI: 10.4236/tel.2016.65097
Abstract: This paper analyzes the characteristics of asset bubbles in a small open economy. First, we show that financial globalization relaxes the existence conditions for asset bubbles. This result implies that more countries may experience asset bubbles in a global economy. Second, we show that the effect of asset bubbles in a global economy is larger than in a closed economy. In particular, countries with high financial friction experience a high economic growth rate before a foreign bubble bursts and they are subjected to more negative influence after that. This conclusion implies that financial globalization may cause large economic movements before and after a bubble bursts.
Financial bubbles: mechanisms and diagnostics  [PDF]
Didier Sornette,Peter Cauwels
Quantitative Finance , 2014,
Abstract: We define a financial bubble as a period of unsustainable growth, when the price of an asset increases ever more quickly, in a series of accelerating phases of corrections and rebounds. More technically, during a bubble phase, the price follows a faster-than-exponential power law growth process, often accompanied by log-periodic oscillations. This dynamic ends abruptly in a change of regime that may be a crash or a substantial correction. Because they leave such specific traces, bubbles may be recognised in advance, that is, before they burst. In this paper, we will explain the mechanism behind financial bubbles in an intuitive way. We will show how the log-periodic power law emerges spontaneously from the complex system that financial markets are, as a consequence of feedback mechanisms, hierarchical structure and specific trading dynamics and investment styles. We argue that the risk of a major correction, or even a crash, becomes substantial when a bubble develops towards maturity, and that it is therefore very important to find evidence of bubbles and to follow their development from as early a stage as possible. The tools that are explained in this paper actually serve that purpose. They are at the core of the Financial Crisis Observatory at the ETH Zurich, where tens of thousands of assets are monitored on a daily basis. This allow us to have a continuous overview of emerging bubbles in the global financial markets. The companion report available as part of the Notenstein white paper series (2014) with the title ``Financial bubbles: mechanism, diagnostic and state of the World (Feb. 2014)'' presents a practical application of the methodology outlines in this article and describes our view of the status concerning positive and negative bubbles in the financial markets, as of the end of January 2014.
Recurrence Quantification Analysis of Financial Market Crashes and Crises  [PDF]
Oleksandr Piskun,Sergii Piskun
Quantitative Finance , 2011,
Abstract: Financial markets are systems with the complex behavior, that can be hardly analyzed by means of linear methods. Recurrence Quantification Analysis (RQA) is a nonlinear methodology, which is able to work with the nonstationary and short data series. Thus, we apply RQA for the studying of the critical events on financial markets. For the present research, stock crashes of DJI 1929; DJI, NYSE and S&P500 1987; NASDAQ 2000; HSI 1994, 1997 and Spanish 1992, Portuguese 1992, British 1992, German 1992, Italian 1992, Mexican 1994, Brazilian 1999, Indonesian 1997, Thai 1997, Malaysian 1997, Philippine 1997, Russian 1998, Turkish 2001, Argentine 2002 currency devaluations were taken. The recent world financial crisis of 2007-2010 was considered as well. The possibility of LAM measure to serve as a tool for the revealing, monitoring, analysing and precursoring of financial bubbles, crises and crashes was asserted.
The Recent History of Financial Crises in Turkey
Ali Ar?, Raif Cergibozan
The Journal of European Theoretical and Applied Studies , 2014, DOI: -
Abstract: The Turkish economy encountered several financial and economic crises since its foundation in 1923. However, the frequency of these crises has sharply increased in the aftermath of the liberalization policies implemented through 1980s as illustrated by the 1994, 1998-99, 2000-01, 2006, 2008-09 financial crises. In this paper, we aim to assess the causes and consequences of these crises from a comparative perspective. According to our descriptive analysis, the financial crises occurred in 1990s mostly result from domestic macroeconomic imbalances and banking sector weaknesses that are exacerbated by volatile capital in- and outflows; while the financial crises through 2000s are mostly related to external economic and financial problems.
What Role Have Banks in Financial Crises?
Alin Marius ANDRIES
Review of Economic and Business Studies (REBS) , 2009,
Abstract: Financial crises mainly manifest themselves at the level of financial institutions. Although financial crises can also be generated within non-financial institutions, the role of banking institutions in the occurrence, transmitting and solving of financial crises is a deciding one. Banks play a deciding role in the development of financial crises as financial intermediaries who contribute to the efficient transfer of funds from the abundant agent towards the deficit agents. Banks can facilitate the financial crises through the activities performed on the financial markets that can influence the interest rates, the uncertainty on the market and the price of assets, but moreover bank crises can occur that transform financial crises. This paper aims to analyze the role of banks in the emergence, the propagation, the prevention or solving financial crises.
The Impact of Asset Price Bubbles on Credit Risk Measures  [PDF]
Michael Jacobs Jr.
Journal of Financial Risk Management (JFRM) , 2015, DOI: 10.4236/jfrm.2015.44019
Abstract: This study presents an analysis of the impact of asset price bubbles on standard credit risk measures, including Expected Loss (“EL”) and Credit Value-at-Risk (“CVaR”). We present a styled model of asset price bubbles in continuous time, and perform a simulation experiment of a 2 dimensional Stochastic Differential Equation (“SDE”) system for asset value determining Probability of Default (“PD”) through a Constant Elasticity of Variance (“CEV”) process, as well as a correlated a Loss-Given-Default (“LGD”) through a mean reverting Cox-Ingersoll-Ross (“CIR”) process having a long-run mean dependent upon the asset value. Comparing bubble to non-bubble economies, it is shown that asset price bubbles may cause an obligor’s traditional credit risk measures, such as EL and CVaR to decline, due to a reduction in both the standard deviation and right skewness of the credit loss distribution. We propose a new risk measure in the credit risk literature to account for losses associated with a bubble bursting, the Expected Holding Period Credit Loss (“EHPCL”), a phenomenon that must be taken into consideration for the proper determination of economic capital for both credit risk management and measurement purposes.
Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis  [PDF]
Didier Sornette,Ryan Woodard
Quantitative Finance , 2009, DOI: 10.1007/978-4-431-53853-0_6
Abstract: The financial crisis of 2008, which started with an initially well-defined epicenter focused on mortgage backed securities (MBS), has been cascading into a global economic recession, whose increasing severity and uncertain duration has led and is continuing to lead to massive losses and damage for billions of people. Heavy central bank interventions and government spending programs have been launched worldwide and especially in the USA and Europe, with the hope to unfreeze credit and boltster consumption. Here, we present evidence and articulate a general framework that allows one to diagnose the fundamental cause of the unfolding financial and economic crisis: the accumulation of several bubbles and their interplay and mutual reinforcement has led to an illusion of a "perpetual money machine" allowing financial institutions to extract wealth from an unsustainable artificial process. Taking stock of this diagnostic, we conclude that many of the interventions to address the so-called liquidity crisis and to encourage more consumption are ill-advised and even dangerous, given that precautionary reserves were not accumulated in the "good times" but that huge liabilities were. The most "interesting" present times constitute unique opportunities but also great challenges, for which we offer a few recommendations.
Role of Diversification Risk in Financial Bubbles  [PDF]
Wanfeng Yan,Ryan Woodard,Didier Sornette
Quantitative Finance , 2011,
Abstract: We present an extension of the Johansen-Ledoit-Sornette (JLS) model to include an additional pricing factor called the "Zipf factor", which describes the diversification risk of the stock market portfolio. Keeping all the dynamical characteristics of a bubble described in the JLS model, the new model provides additional information about the concentration of stock gains over time. This allows us to understand better the risk diversification and to explain the investors' behavior during the bubble generation. We apply this new model to two famous Chinese stock bubbles, from August 2006 to October 2007 (bubble 1) and from October 2008 to August 2009 (bubble 2). The Zipf factor is found highly significant for bubble 1, corresponding to the fact that valuation gains were more concentrated on the large firms of the Shanghai index. It is likely that the widespread acknowledgement of the 80-20 rule in the Chinese media and discussion forums led many investors to discount the risk of a lack of diversification, therefore enhancing the role of the Zipf factor. For bubble 2, the Zipf factor is found marginally relevant, suggesting a larger weight of market gains on small firms. We interpret this result as the consequence of the response of the Chinese economy to the very large stimulus provided by the Chinese government in the aftermath of the 2008 financial crisis.
Financial crises and the evaporation of trust  [PDF]
Kartik Anand,Prasanna Gai,Matteo Marsili
Quantitative Finance , 2009,
Abstract: Trust lies at the crux of most economic transactions, with credit markets being a notable example. Drawing on insights from the literature on coordination games and network growth, we develop a simple model to clarify how trust breaks down in financial systems. We show how the arrival of bad news about a financial agent can lead others to lose confidence in it and how this, in turn, can spread across the entire system. Our results emphasize the role of hysteresis -- it takes considerable effort to regain trust once it has been broken. Although simple, the model provides a plausible account of the credit freeze that followed the global financial crisis of 2007/8, both in terms of the sequence of events and the measures taken (and being proposed) by the authorities.
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