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Video - Bubble Trouble: Universal switching patterns in market trends

Wed, 16 Nov 2011 02:35:00 GMT

When a stock market rises unsustainably, it can create a financial bubble that sooner or later will burst. In this TEDx Video, Dr. Tobias Preis explains how concepts from physics can be used to create a law describing exactly how such crashes occur.

Many thanks go to Mark Buchanan over at the brilliant, The Physics of Finance Blog, for putting me in touch with Tobias and for his commentary on the paper this talk originates from.

Tobias also has his own excellent web page here.

 

One of the more intriguing simple facts about market fluctuations is their self-similarity in time. The statistics of market fluctuations over a short time, if stretched out in time and rescaled in value, look identical to fluctuations over longer times. What's happening over seconds is somehow intimately linked up with what's happening over hours, days or months.

This geometric order follows from no end of modern studies of the statistics of market returns, which find power laws all over the place. Mandelbrot himself gave a nice exploration of self-similarity in market movements more than a decade ago in the wake of the meltdown of Long Term Capital Management, which was caused in part by an inadequate appreciation of the likelihood of sudden large fluctuations in any system with fluctuations of this sort. Now everyone knows about Black Swans and fat tails, but there may be much deeper secrets lurking in the delicate structure of market ups and downs.

That's the contention at least of Tobias Preis and colleagues in a recent paper in the Proceedings of the National Academy of Sciences. It is not by any means an easy study to digest and understand, but it seems quite important as it hints at some deep regularities in the way markets switch between upward and downward trends over a huge range of timescales from seconds up to years. Indeed, it suggests that some very fundamental collective pattern of human decision making -- as individuals sense the shifting views of others and become more likely to act in the same way -- lie behind many market rallies and crashes, regardless of the timescale on which they play out...

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