The Shanghai Composite Index will burst between July 17 and 27, according to a new econophysics forecast.
...The theorist behind this prediction is Didier Sornette at the Swiss Federal Institute of Technology, in Zurich, who has pioneered the study of market bubbles. Last year, he used his method for spotting bubbles to reveal that oil prices where dangerously inflated.
The
telltale sign of a bubble, he says, is a faster than exponential
growth rate caused by a positive feedback mechanism that generates
this nonlinear growth.
The faster than exponential growth rate is relatively easy to spot. According to the analysis done by Sornette and a few mates, the Shanghai Composite Index certainly seems to have had a faster than exponential growth--a 69 percent rise since October of last year.
Whether an unsustainable positive feedback mechanism is causing this growth isn't so clear. Sornette and co suggest that what is responsible is the Chinese government's massive lending spree designed to maintain its economic growth rate at 8 percent a year. China has maintained that kind of growth for some years now...
Get the paper: The Chinese Equity Bubble: Ready to Burst (pdf) from arXiv
Abstract:
Amid the current financial crisis, there has been one equity index beating all others: the Shanghai Composite. Our analysis of this main Chinese equity index shows clear signatures of a bubble build up and we go on to predict its most likely crash date: July 17-27, 2009 (20%/80% quantile confidence interval).
Stochastic Simulation and Applications in Finance with MATLAB Programs
Huu Tue Huynh, Van Son Lai & Issouf Soumare
A comprehensive text explaining the theory and practice of stochastic processes in financial engineering covering mathematical and computational techniques.
ISBN: 9780470725382 – 360 pages – Cloth - 19-Jan-09 - £60.0
