Ambiguity Resolution, the Coming U.S. Market Crash of October 2020 and Ensuing Golden Age of Finance

17 Pages Posted: 22 Sep 2020

Date Written: September 13, 2020

Abstract

It is uncanny that historically, the large majority of U.S. market crashes have occurred in the month of October. I assert that three key conditions are gathered for this to happen. 1) There is a market-wide or macroeconomic informational ambiguity that has been lingering since before the summer months with high downside risk; 2) that despite this ambiguity, leverage is used to create a bubble and 3) that investors are driven by what I call the “ambiguity-forced-resolution bias.” I apply this reasoning to predict a crash in October 2020. I show that there currently is a bubble in the U.S. using a new indicator. I test that ambiguity/uncertainty was unusually high in months prior October crashes. Finally, I discuss why this upcoming crash is an opportunity for investors to reorder the equity market’s priorities to fund sectors that tackle rising societal and environmental challenges.

Keywords: optimism, pessimism, uncertainty, ambiguity aversion bias, forced resolution, market crash

JEL Classification: G01, G02

Suggested Citation

Faugère, Christophe, Ambiguity Resolution, the Coming U.S. Market Crash of October 2020 and Ensuing Golden Age of Finance (September 13, 2020). Available at SSRN: https://ssrn.com/abstract=3692057 or http://dx.doi.org/10.2139/ssrn.3692057

Christophe Faugère (Contact Author)

Kedge Business School Bordeaux ( email )

680 Cours de la Liberation
Bordeaux, Aquitaine 33405
France

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