Abstract
Speculative bubbles have throughout the times foiled various scholars; many have tried to accurately predict their ends, but few have succeeded. In this study, we examine the robustness and ex-ante usability of the log-periodic power-law model in predicting end dates of speculative bubbles on one mature and two emerging financial markets. We have found that the predicted end dates are somewhat dependent on at which point in time the prediction is conducted, especially in regards to at which point in the oscillatory cycle the prediction is conducted. This is mostly due to that predictions are sensitive to their most recent price movements, especially when data is limited and a clear oscillatory pattern is not yet established. We conclude that observing one particular estimation without further context can be misleading. To achieve a sound understanding of and reasonable expectations on how prices might develop it is necessary to follow a bubble as it develops. This study is, to our knowledge, first to examine to what extent the predictions of the model are dependent on at which point in time the predictions are conducted.
Highlights
Speculative bubbles can be traced far back in history, and have throughout the time's foiled various scholars
Shiller successfully predicted the crash of the dot-com bubble in 2000 and that of the housing bubble in 2007 (Shiller 2005), while Minsky’s financial instability hypothesis could explain the subprime crisis which accompanied the housing bubble of 2007
We focus on the bubbles preceding three well-known crashes; the Black Monday crash of 1987, the burst of the emerging markets bubble in 1997 and the Chinese stock market crash in 2015
Summary
Speculative bubbles can be traced far back in history, and have throughout the time's foiled various scholars. Experts have suggested that this time is different, but history has proved that heavy debt-accumulation and speculative behavior strikes back. Technology has improved in society, as has the height of human capital, but the ability of governments, banks, and investors to delude themselves seems to remain constant (Reinhart and Rogoff 2009). Minsky (1986) and Shiller (2005) are two out of many economists who have made attempts to explain the underlying causes of and the structural imbalances which precede financial bubbles. Shiller successfully predicted the crash of the dot-com bubble in 2000 and that of the housing bubble in 2007 (Shiller 2005), while Minsky’s financial instability hypothesis could explain the subprime crisis which accompanied the housing bubble of 2007
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