Real-Time Prediction and Post-Mortem Analysis of the Shanghai 2015 Stock Market Bubble and Crash

16 Pages Posted: 22 Nov 2015

See all articles by Didier Sornette

Didier Sornette

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

Guilherme Demos

ETH Zurich

Qun Zhang

ETH Zurich; Guangdong University of Foreign Studies; South China University of Technology

Peter Cauwels

ETH Zurich; Director Quaerens CommV

Vladimir Filimonov

Swiss Federal Institute of Technology Zurich (ETH Zurich)

Qunzhi Zhang

ETH Zurich

Date Written: August 6, 2015

Abstract

The authors assess the performance of the real-time diagnostic, openly presented to the public on the website of the Financial Crisis Observatory (FCO) at ETH Zurich, of the bubble regime that developed in Chinese stock markets since mid-2014 and that started to burst in June 2015. The analysis is based on (i) the economic theory of rational expectation bubbles, (ii) behavioural mechanisms of imitation and herding of investors and traders and (iii) the mathematical formulation of the Log-Periodic Power Law Singularity (LPPLS) that describes the critical approach towards a tipping point in complex systems. The authors document how the real-time predictions were presented in the automated analysis of the FCO, as well as in our monthly FCO Cockpit report of June 2015. A complementary postmortem analysis on the nature and value of the LPPLS methodology to diagnose the SSEC bubble and its termination is also given.

Keywords: Financial bubbles, Crashes, Probabilistic forecast, Johansen-Ledoit-Sornette model, Log-periodic power law singularity (LPPLS), Advanced warning, Chinese bubbles, Financial crisis observatory

JEL Classification: F37, G01, G17

Suggested Citation

Sornette, Didier and Demos, Guilherme and Zhang, Qun and Cauwels, Peter and Filimonov, Vladimir and Zhang, Qunzhi, Real-Time Prediction and Post-Mortem Analysis of the Shanghai 2015 Stock Market Bubble and Crash (August 6, 2015). Swiss Finance Institute Research Paper No. 15-31. Available at SSRN: https://ssrn.com/abstract=2693634 or http://dx.doi.org/10.2139/ssrn.2693634

Didier Sornette (Contact Author)

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/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Guilherme Demos

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Qun Zhang

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Guangdong University of Foreign Studies ( email )

Collaborative Innovation Center for Silk Road
Guangzhou, Guangdong
China

South China University of Technology ( email )

Wushan
Guangzhou, AR Guangdong 510640
China

Peter Cauwels

ETH Zurich

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Director Quaerens CommV ( email )

Bruges
Belgium

Vladimir Filimonov

Swiss Federal Institute of Technology Zurich (ETH Zurich) ( email )

Scheuchzerstrasse 7, SEC F3
Zurich, CH-8092
Switzerland

Qunzhi Zhang

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

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