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Why Stock Markets Crash Critical Events in Complex Financial Systems 1st Edition by Didier Sornette ISBN 1400829550 9781400829552

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Author(s): Didier Sornette
ISBN(s): 9781400829552, 1400829550
Edition: Course Book
File Details: PDF, 4.14 MB
Year: 2009
Language: english
SKU: EB-51948374 Category: Tag:

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ISBN 10: 1400829550 
ISBN 13: 9781400829552
Author: Didier Sornette

The scientific study of complex systems has transformed a wide range of disciplines in recent years, enabling researchers in both the natural and social sciences to model and predict phenomena as diverse as earthquakes, global warming, demographic patterns, financial crises, and the failure of materials. In this book, Didier Sornette boldly applies his varied experience in these areas to propose a simple, powerful, and general theory of how, why, and when stock markets crash. 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. Any investor or investment professional who seeks a genuine understanding of looming financial disasters should read this book. Physicists, geologists, biologists, economists, and others will welcome Why Stock Markets Crash as a highly original “scientific tale,” as Sornette aptly puts it, of the exciting and sometimes fearsome–but no longer quite so unfathomable–world of stock markets.

Why Stock Markets Crash Critical Events in Complex Financial Systems 1st Table of contents:

Part I: The Problem and the Tools

  1. Introduction: From Bubbles and Crashes to a Science of Crises
    • The Intuitive View of Crashes
    • The Need for a Scientific Approach
    • Complex Systems Perspective
    • Overview of the Book’s Aims and Scope
  2. A Brief History of Market Crashes
    • Major Historical Crashes (e.g., 1929, 1987, Asian Crisis, Russian Crisis)
    • Similarities and Differences
    • The Psychology of Bubbles
  3. Basic Concepts of Financial Markets
    • Assets, Prices, Returns, Volatility
    • Efficient Market Hypothesis (EMH) and Its Limitations
    • Random Walks and Their Failures
  4. Complex Systems and Critical Phenomena
    • Introduction to Complexity Theory
    • Phase Transitions and Critical Points
    • Self-Organized Criticality
    • Analogy to Earthquakes and Other Natural Disasters
  5. Tools from Statistical Physics
    • Power Laws and Scaling
    • Fractals and Multifractals
    • Non-Gaussian Distributions (Fat Tails)
    • Chaos Theory (Deterministic Chaos)

Part II: Bubbles, Crashes, and Dragon-Kings

  1. The Log-Periodic Power Law (LPPL) Model of Financial Bubbles and Crashes
    • Mathematical Formulation of the LPPL Signature
    • Definition of a Bubble as a Finite-Time Singularity
    • Forecasting Crisis Times
    • Calibration and Parameter Estimation
  2. Empirical Evidence of LPPL Signatures in Bubbles
    • Case Studies of Historical Crashes (e.g., 1987, dot-com bubble)
    • Statistical Validation of the LPPL Model
    • Limitations and Challenges in Application
  3. Mechanism for the LPPL Signature: Agent Interaction and Herding
    • Explaining the Criticality from Microscopic Interactions
    • Positive Feedback Loops
    • Herding Behavior and Imitation
    • Rational Bubbles vs. Psychological Bubbles
  4. Dragon-Kings: The Outliers That Drive Crashes
    • The Concept of Dragon-Kings: Extreme Events beyond Power Laws
    • Why Crashes Are Different from “Normal” Fluctuations
    • Specific Mechanisms for Dragon-King Formation
  5. Exogenous vs. Endogenous Crashes
    • Distinguishing Between External Shocks and Internal Instabilities
    • The Precursors and Signatures of Endogenous Crashes
    • The Interplay of Both Factors

Part III: Forecasting, Risk Management, and Beyond

  1. Forecasting Crashes: Opportunities and Limits
    • The Philosophical and Practical Challenges of Prediction
    • Statistical Forecasting vs. Deterministic Prediction
    • Probabilistic Forecasts and Confidence Intervals
    • Ethical Considerations of Forecasting Crashes
  2. Early Warning Signals and Indicators
    • Volatility Clustering
    • Market Microstructure Indicators
    • News Sentiment Analysis (if covered at that time)
    • Stress Testing and Scenario Analysis
  3. Risk Management in the Face of Critical Events
    • Limitations of Standard Risk Models (e.g., VaR)
    • Managing Tail Risk and Extreme Events
    • Portfolio Diversification and Hedging Strategies
    • Regulatory Implications
  4. The Collective Brain of Financial Markets
    • Markets as Information Processing Systems
    • The Role of Noise and Information Cascades
    • Social Contagion and Epidemic Models in Finance
  5. Beyond Stock Markets: Application to Other Complex Systems
    • Earthquakes and Fault Systems
    • Brain Activity
    • Rupture in Materials
    • Social and Political Crises
  6. Conclusion: A Science of Crises for the 21st Century
    • Recap of Key Findings
    • Implications for Academia, Industry, and Policy Makers
    • Future Directions for Research

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Tags: Didier Sornette, Stock, Crash