Diagnosis and Prediction of Market Rebounds in Financial Markets

Much research has been conducted arguing that tipping points at which complex systems experience phase transitions are difficult to identify. To test the existence of tipping points in financial markets, based on the alternating offer strategic model we propose a network of bargaining agents who mutually either cooperate or where the feedback mechanism between trading and price dynamics is driven by an external "hidden" variable R that quantifies the degree of market overpric...

Standard economic theory assumes that agents in markets behave rationally. However, the observation of extremely large fluctuations in the price of financial assets that are not correlated to changes in their fundamental value, as well as the extreme instance of financial bubbles and crashes, imply that markets (at least occasionally) do display irrational behavior. In this paper, we briefly outline our recent work demonstrating that a market with interacting agents having bo...

We propose that imitation between traders and their herding behaviour not only lead to speculative bubbles with accelerating over-valuations of financial markets possibly followed by crashes, but also to ``anti-bubbles'' with decelerating market devaluations following all-time highs. For this, we propose a simple market dynamics model in which the demand decreases slowly with barriers that progressively quench in, leading to a power law decay of the market price decorated by ...

This paper presents an exclusive classification of the largest crashes in Dow Jones Industrial Average (DJIA), SP500 and NASDAQ in the past century. Crashes are objectively defined as the top-rank filtered drawdowns (loss from the last local maximum to the next local minimum disregarding noise fluctuations), where the size of the filter is determined by the historical volatility of the index. It is shown that {\it all} crashes can be linked to either an external shock, {\it e...

We seek to deepen understanding of the micro-foundations of institutionalization while contributing to a sociological theory of markets by investigating the puzzle of price bubbles in financial markets. We find that such markets, despite textbook conditions of high efficiency -- perfect information, atomistic agents, no uncertainty -- quickly develop patterns consistent with institutionalization processes.

This paper addresses the statistical properties of time series driven by rational bubbles a la Blanchard and Watson (1982), corresponding to multiplicative maps, whose study has recently be revived recently in physics as a mechanism of intermittent dynamics generating power law distributions. Using insights on the behavior of multiplicative stochastic processes, we demonstrate that the tails of the unconditional distribution emerging from such bubble processes follow power-la...

Following a long tradition of physicists who have noticed that the Ising model provides a general background to build realistic models of social interactions, we study a model of financial price dynamics resulting from the collective aggregate decisions of agents. This model incorporates imitation, the impact of external news and private information. It has the structure of a dynamical Ising model in which agents have two opinions (buy or sell) with coupling coefficients whic...

In a recent comment (Johansen A 2003 An alternative view, Quant. Finance 3: C6-C7, cond-mat/0302141), Anders Johansen has criticized our methodology and has questioned several of our results published in [Sornette D and Zhou W-X 2002 The US 2000-2002 market descent: how much longer and deeper? Quant. Finance 2: 468-81, cond-mat/0209065] and in our two consequent preprints [cond-mat/0212010, physics/0301023]. In the present reply, we clarify the issues on (i) the analogy betwe...

We define and study a rather complex market model, inspired from the Santa Fe artificial market and the Minority Game. Agents have different strategies among which they can choose, according to their relative profitability, with the possibility of not participating to the market. The price is updated according to the excess demand, and the wealth of the agents is properly accounted for. Only two parameters play a significant role: one describes the impact of trading on the pr...

We show that infinite divisibility of a trading commodity leads to a self-sustained price bubble when traders use adaptive investment strategies. The adaptive strategy can be viewed as a psychological response of a trader to the situation when the trader's estimation of future prices does not match the actual, realized price. We use a multi-agent model to illustrate the price bubble formation and to quantify its main statistical properties such as the return, the volatility, ...