Clarifications to Questions and Criticisms on the Johansen-Ledoit-Sornette Bubble Model
Swiss Finance Institute; ETH Zurich
East China University of Science and Technology - School of Business
August 11, 2011
Swiss Finance Institute Research Paper No. 11-29
The Johansen-Ledoit-Sornette (JLS) model of rational expectation bubbles with finite-time singular crash hazard rates has been developed to describe the dynamics of financial bubbles and crashes. It has been applied successfully to a large variety of financial bubbles in many different markets. Having been developed for more than one decade, the JLS model has been studied, analyzed, used and criticized by several researchers. Much of this discussion is helpful for advancing the research. However, several serious misconceptions seem to be present within this collective conversation both on theoretical and empirical aspects. Several of these problems appear to stem from the fast evolution of the literature on the JLS model and related works. In the hope of removing possible misunderstanding and of catalyzing useful future developments, we summarize these common questions and criticisms concerning the JLS model and offer a synthesis of the existing state-of-the-art and best-practice advices.
Number of Pages in PDF File: 25
Keywords: JLS model, financial bubbles, crashes, log-periodic power law, fit method, sloppiness, taboo search, bootstrap, probabilistic forecast
JEL Classification: C14, C53, E47, G01, G17working papers series
Date posted: August 12, 2011
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