Clarifications to Questions and Criticisms on the Johansen-Ledoit-Sornette Bubble Model

25 Pages Posted: 12 Aug 2011  

Didier Sornette

Swiss Finance Institute; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)

Ryan Woodard

ETH Zurich

Wanfeng Yan

ETH Zurich

Wei-Xing Zhou

East China University of Science and Technology - School of Business

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Date Written: August 11, 2011

Abstract

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.

Keywords: JLS model, financial bubbles, crashes, log-periodic power law, fit method, sloppiness, taboo search, bootstrap, probabilistic forecast

JEL Classification: C14, C53, E47, G01, G17

Suggested Citation

Sornette, Didier and Woodard, Ryan and Yan, Wanfeng and Zhou, Wei-Xing, Clarifications to Questions and Criticisms on the Johansen-Ledoit-Sornette Bubble Model (August 11, 2011). Swiss Finance Institute Research Paper No. 11-29. Available at SSRN: https://ssrn.com/abstract=1908240 or http://dx.doi.org/10.2139/ssrn.1908240

Didier Sornette (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Ryan Woodard

ETH Zurich ( email )

Department of Management, Technology and Economics
Kreuzplatz 5
8032 Zurich, CH-1015
Switzerland
+41 44 632 83 79 (Phone)
+41 44 632 19 14 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Wanfeng Yan

ETH Zurich ( email )

ETH-Zentrum KPL
Kreuzplatz 5
Zurich, CH-8032
Switzerland

Wei-Xing Zhou

East China University of Science and Technology - School of Business ( email )

130 Meilong Road
Shanghai, 200237
China

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