Physicists Predict Stock Market Crashes

physorg.com ^ | February 24, 2006

[InvisibleChurch]

On Monday, October 19, 1987 – infamously known as “black Monday” – the Dow fell 508 points, or 22.9%, marking the largest crash in history. Using an analytical approach similar to the one applied to explore heart rate, physicists have discovered some unusual events preceding the crash. These findings may help economists in risk analysis and in predicting inevitable future crashes.

continue Physicists Predict Stock Market Crashes

[InvisibleChurch]

This graph shows the behavior of log returns in the S&P 500 index during 1984-1995. The inset shows the log returns on a 10-minute scale in region C (black Monday). The probability of large fluctuations at this time accompanies the onset of the crash. Source: Kiyono et al.

[dfwgator]

An a related story, football players predict a comet will crash into Earth in the next 10 years.

[proxy_user]

Well, with so many predictions, someone is bound to be right.

It might well be the football players....

[InvisibleChurch]

link?

; )

[CROSSHIGHWAYMAN]

Looks like the S&P has been doubling every 10 years since 1980.

I'll take that.......and the dividends too!

[Darkwolf377]

In related news, milkmen predicted the 2008 election. They say it's someone who drinks 2%, so it obviously ain't Hillary.

[SpaceBar]

Who will predict the predictors?

[varon]

In related news, milkmen predicted the 2008 election. They say it's someone who drinks 2%, so it obviously ain't Hillary.

Nor Monica ;-)

[Darkwolf377]

Yeah, someone posted a picture of her the other day. The shape she's in now, Bill would have cheated on her with Hillary.

[the invisib1e hand]

let's propose a more accurate title, shall we?

How about,

"Physicists back-fit data to imply that stock market crashes are predictable, but really only succeed in stating the obvious in twenty-dollar words."

This “critical” model builds on the idea that the volatility, or variation, of price changes can quantitatively measure how much the market may fluctuate. In fact, volatility – not actual price – is the key input in Black and Scholes’ “option pricing” model on price variation over time, developed in 1973 and highly influential in financial markets.

One of the first addages I learned was that "volatility sometimes accompanies a trend change." That was, interestingly, in 1986.

Now, as to "volatility" and the "Black Scholes Model." It strikes me as cheesy logic -- or an inadequetaly developed point -- to make the association that the Black Scholes input of volatility is in any way related to the premise of this article. Volatility has always been a proxy for risk, for uncertainty, and the premium an option writer charges is related to his risk in providing the option; an option-pricing model must take that risk into consideration.

But to use the ubiquitousness of Black Scholes in this manners seems like a stretch to lend credibility to the premise of the subject.

[vetvetdoug]

Monica is an example of why women need to get married in the early twenties because if they wait till the middle or late thirties many of them will look like Monica. There are many women that take care of themselves but the majority of women in the thirties or forties gravity attacks them with a voracious appetite.

Flame away but statistics and weight studies in women prove me out.

[Darkwolf377]

I won't flame you, but I'm stepping away carefully so as not to get burned... ;)

[burzum]

Now, as to "volatility" and the "Black Scholes Model." It strikes me as cheesy logic -- or an inadequetaly developed point -- to make the association that the Black Scholes input of volatility is in any way related to the premise of this article. Volatility has always been a proxy for risk, for uncertainty, and the premium an option writer charges is related to his risk in providing the option; an option-pricing model must take that risk into consideration.

It seems to me that what the physicists were describing was a bifurcation point at the stock market crashes. This seems to me to be a reasonable conclusion because the variance of a parameter (in this case the volatility) eventually made a point unstable; hence, the stocks shot down to another stable point.

[ASA Vet]

Flame away but statistics and weight studies in women prove me out.

Sure glad gravity and age only effects women, and leaves us sexy older guys alone.

[VOA]

bump

[edsheppa]

I think the point is that Black-Scholes assumes a certain kind of probability distribution for returns. If that assumption is wrong (as some argue) then it will predict wrongly and so, e.g. one won't hedge properly.

[js1138]

Now as soon as crashes can be reliably predicted BEFORE they happen, instead of after...

Of course a reliable predictor of market behavior would affect the market in unpredictable ways.

[the invisib1e hand]

oy...everything you say may be true, but to confuse the stock market with a predictable physical animal is a classic -- make that Classic -- presumption.

[the invisib1e hand]

I think the point is that Black-Scholes assumes a certain kind of probability distribution for returns. If that assumption is wrong (as some argue) then it will predict wrongly and so, e.g. one won't hedge properly.

This may be true, but I don't see how you get it from the article...they just toss out "volatility" and "that influential Black Scholes model" as if it endorses their work. As I said, it's not an effective argument.

[the invisib1e hand]

Of course a reliable predictor of market behavior would affect the market in unpredictable ways.

of course! like causing an earlier crash...