Everything You Always Wanted to Know About Log Periodic Power Laws for Bubble Modelling But Were Afraid to Ask

European Journal of Finance, Forthcoming

35 Pages Posted: 1 Feb 2011  

Dean Fantazzini

Moscow School of Economics, Moscow State University; National Research University Higher School of Economics

Petr Geraskin

National Research University Higher School of Economics

Date Written: January 31, 2011

Abstract

Sornette et al. (1996), Sornette and Johansen (1997), Johansen et al. (2000) and Sornette (2003a) proposed that, prior to crashes, the mean function of a stock index price time series is characterized by a power law decorated with log-periodic oscillations, leading to a critical point that describes the beginning of the market crash. This paper reviews the original Log-Periodic Power Law (LPPL) model for financial bubble modelling, and discusses early criticism and recent generalizations proposed to answer these remarks. We show how to fit these models with alternative methodologies, together with diagnostic tests and graphical tools to diagnose financial bubbles in the making in real time. An application of this methodology to the Gold bubble which busted in December 2009 is then presented.

Keywords: Log-periodic models, LPPL, Crash, Bubble, Anti-Bubble, GARCH, Forecasting, Gold

JEL Classification: C32, C51, C53, G17

Suggested Citation

Fantazzini, Dean and Geraskin, Petr, Everything You Always Wanted to Know About Log Periodic Power Laws for Bubble Modelling But Were Afraid to Ask (January 31, 2011). European Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1752115

Dean Fantazzini (Contact Author)

Moscow School of Economics, Moscow State University ( email )

GSP-2, Leninskie Gory
Moscow, 119992
Russia
+7 495 5105256 (Phone)
+7 495 5105267 (Fax)

HOME PAGE: https://sites.google.com/site/deanfantazzini/

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

HOME PAGE: http://www.hse.ru/org/persons/11532644

Petr Geraskin

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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