TY - JOUR
T1 - Testing for financial crashes using the Log Periodic Power Law model
AU - Brée, David S.
AU - Joseph, Nathan Lael
PY - 2013/6/5
Y1 - 2013/6/5
N2 - Many papers claim that a Log Periodic Power Law (LPPL) model fitted to financial market bubbles that precede large market falls or 'crashes', contains parameters that are confined within certain ranges. Further, it is claimed that the underlying model is based on influence percolation and a martingale condition. This paper examines these claims and their validity for capturing large price falls in the Hang Seng stock market index over the period 1970 to 2008. The fitted LPPLs have parameter values within the ranges specified post hoc by Johansen and Sornette (2001) for only seven of these 11 crashes. Interestingly, the LPPL fit could have predicted the substantial fall in the Hang Seng index during the recent global downturn. Overall, the mechanism posited as underlying the LPPL model does not do so, and the data used to support the fit of the LPPL model to bubbles does so only partially. © 2013.
AB - Many papers claim that a Log Periodic Power Law (LPPL) model fitted to financial market bubbles that precede large market falls or 'crashes', contains parameters that are confined within certain ranges. Further, it is claimed that the underlying model is based on influence percolation and a martingale condition. This paper examines these claims and their validity for capturing large price falls in the Hang Seng stock market index over the period 1970 to 2008. The fitted LPPLs have parameter values within the ranges specified post hoc by Johansen and Sornette (2001) for only seven of these 11 crashes. Interestingly, the LPPL fit could have predicted the substantial fall in the Hang Seng index during the recent global downturn. Overall, the mechanism posited as underlying the LPPL model does not do so, and the data used to support the fit of the LPPL model to bubbles does so only partially. © 2013.
KW - Bubbles and crashes
KW - Financial time series
KW - Log Periodic Power Law
KW - Nonlinear time series
KW - Robustness
UR - https://www.mendeley.com/catalogue/79eaf484-4f90-308f-a0f3-daee4cab82c0/
UR - https://www.scopus.com/pages/publications/84888837434
U2 - 10.1016/j.irfa.2013.05.005
DO - 10.1016/j.irfa.2013.05.005
M3 - Article
SN - 1057-5219
VL - 30
SP - 287
EP - 297
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
ER -