Modelling Bubbles and Anti-Bubbles in Bear Markets: A Medium-Term Trading Analysis
THE HANDBOOK OF TRADING, McGraw-Hill Finance and Investing, pp. 365-388, 2010
Posted: 13 Aug 2010
Date Written: August 11, 2010
The current volatile market situation with sudden changes seems all but predictable. However, some recent works have suggested that, prior to crashes as well as after crashes, financial asset prices can be characterized by a power law acceleration decorated with log-periodic oscillations. Johansen and Sornette (1999) and Zhou and Sornette (2005) show that these processes take place because of the traders’ herding behavior which can progressively occur and strengthen itself into “bullish” or “bearish” market phases, thus forming bubbles and anti-bubbles, respectively. We briefly review the theory behind this kind of modeling and we perform an empirical analysis with different world stock market indexes to verify whether a medium-term trading strategy based on this modeling can outperform simple buy-and-hold or short-and-hold strategies.
Keywords: Log-periodic models, Crashes, Bubbles, Anti-Bubbles, Long-term Forecasting, Out-of-sample Forecasting, Buy-and-Hold, Short-and-Hold
JEL Classification: C32, C51, C53, G17
Suggested Citation: Suggested Citation