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

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