Testing the Stability of the 2000-2003 Us Stock Market 'Antibubble'
32 Pages Posted: 20 Nov 2003
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: Suggested Citation