Testing the Stability of the 2000-2003 US Stock Market 'Antibubble'

32 Pages Posted: 20 Nov 2003  

Wei-Xing Zhou

East China University of Science and Technology - School of Business

Didier Sornette

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

Abstract

Since August 2000, the USA as well as most other western markets have depreciated almost in synchrony according to complex patterns of drops and local rebounds. In a paper published in the December 2002 issue of Quantitative Finance, we have proposed to describe this phenomenon using the concept of a log-periodic power law (LPPL) antibubble, characterizing behavioral herding between investors leading to a competition between positive and negative feedbacks in the pricing process. An online monthly prediction for the future evolution of the US S&P 500 index has been issued, monitored and updated. Here, we test the possible existence of a regime switching in the US S&P 500 antibubble. First, we find some evidence that the antibubble might be on its way to cross-over to a shift in log-periodicity described by a so-called second-order log-periodicity previously documented for the Japanese Nikkei index in the 1990s. Second, we develop a battery of tests to detect a possible end of the antibubble which suggest that the antibubble is still alive and may still continue well in the future. Our tests provide quantitative measures to diagnose the end of the antibubble, when it will come. Such diagnostic is not instantaneous and requires probably three to six months within the new regime before assessing its existence with confidence. In conclusion, our prediction that the S&P 500 is going to plunge progressively from the summer 2003 to bottom in 2004 seems to remain basically intact, possibly with a few month delay extending almost to the end of 2003 if the shift to the second-order log-periodicity is confirmed.

Keywords: Econophysics, Prediction, Log-periodic power law, Antibubble, Hypothesis test

JEL Classification: C53, F47, R53

Suggested Citation

Zhou, Wei-Xing and Sornette, Didier, Testing the Stability of the 2000-2003 US Stock Market 'Antibubble'. Available at SSRN: https://ssrn.com/abstract=454960 or http://dx.doi.org/10.2139/ssrn.454960

Wei-Xing Zhou

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

130 Meilong Road
Shanghai, 200237
China

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/

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