Fry, J. M. (2010): Bubbles and crashes in finance: A phase transition from random to deterministic behaviour in prices.
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We develop a rational expectations model of financial bubbles and study ways in which a generic risk-return interplay is incorporated into prices. We retain the interpretation of the leading Johansen-Ledoit-Sornette model, namely, that the price must rise prior to a crash in order to compensate a representative investor for the level of risk. This is accompanied, in our stochastic model, by an illusion of certainty as described by a decreasing volatility function. As the volatility function goes to zero, crashes can be seen to represent a phase transition from stochastic to deterministic behaviour in prices.
|Item Type:||MPRA Paper|
|Original Title:||Bubbles and crashes in finance: A phase transition from random to deterministic behaviour in prices.|
|Keywords:||financial crashes; super-exponential growth; illusion of certainty; housing-bubble|
|Subjects:||C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods; Simulation Methods
C - Mathematical and Quantitative Methods > C0 - General > C00 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications
|Depositing User:||John Fry|
|Date Deposited:||04. Sep 2010 01:56|
|Last Modified:||13. Feb 2013 19:19|
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