Statistical modelling of financial crashes: Rapid growth, illusion of certainty and contagion
John Fry ()
EERI Research Paper Series from Economics and Econometrics Research Institute (EERI), Brussels
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. The basic model is then extended to incorporate multivariate bubbles and contagion, non-Gaussian models and models based on stochastic volatility. Only in a stochastic volatility model where the mean of the log-returns is considered fixed does volatility increase prior to a crash.
Keywords: Financial crashes; super-exponential growth; illusion of certainty; contagion; housing-bubble. (search for similar items in EconPapers)
JEL-codes: C00 E30 G10 (search for similar items in EconPapers)
Pages: 18 pages
New Economics Papers: this item is included in nep-fdg, nep-fmk, nep-upt and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Working Paper: Statistical modelling of financial crashes: Rapid growth, illusion of certainty and contagion (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eei:rpaper:eeri_rp_2009_10
Access Statistics for this paper
More papers in EERI Research Paper Series from Economics and Econometrics Research Institute (EERI), Brussels Contact information at EDIRC.
Bibliographic data for series maintained by Julia van Hove ().