Bubbles and crashes in finance: A phase transition from random to deterministic behaviour in prices

John Fry

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: financial crashes; super-exponential growth; illusion of certainty; housing-bubble (search for similar items in EconPapers)
JEL-codes: C00 C53 E37 (search for similar items in EconPapers)
Date: 2010-09-03
New Economics Papers: this item is included in nep-ore, nep-upt and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:24778

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