[Paper Review] Log-periodic power law bubbles in Latin-American and Asian markets and correlated anti-bubbles in Western stock markets: An empirical study

Anders Johansen, Didier Sornette|arXiv (Cornell University)|Jan 1, 1999

Complex Systems and Time Series Analysis16 references15 citations

TL;DR

This study identifies log-periodic power law bubbles in 12 emerging Latin-American and Asian stock markets, demonstrating that herding behavior drives crash hazard rates to critical levels, leading to predictable market collapses. It further reveals correlated anti-bubbles in Western markets following major crashes, extending the rational expectation model of bubbles and crashes beyond developed markets.

ABSTRACT

Twenty-two signicant bubbles followed by large crashes or by severe corrections in the Argentinian, Brazilian, Chilean, Mexican, Peruvian, Venezuelan, Hong-Kong, Indonesian, Korean, Malaysian, Philippine and Thai stock markets indices are identied and analysed for log-periodic signatures decorating an average power law acceleration. We nd that log-periodic power laws adequately describe speculative bubbles on these emerging markets with very few exceptions and thus extend considerably the applicability of the proposed rational expectation model of bubbles and crashes which has previously been developed for the major nancial markets in the world. This model is essentially controlled by a crash hazard rate becoming critical due to a collective imitative /herding behavior of traders. Furthermore, three of the bubbles are followed by a log-periodic \\anti-bubble" previously documented for the decay of the Japanese Nikkei starting in Jan. 1990 and the price of Gold starting in S...

Motivation & Objective

• To identify and analyze speculative bubbles in emerging stock markets using log-periodic power law signatures.
• To test whether the rational expectation model of bubbles and crashes applies to emerging markets beyond major developed exchanges.
• To investigate the presence of correlated anti-bubble dynamics in Western markets following major crashes in emerging markets.
• To examine the role of collective herding behavior in driving crash hazard rates to critical thresholds.

Proposed method

• Identification of 22 significant speculative bubbles in stock indices from Argentina, Brazil, Chile, Mexico, Peru, Venezuela, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, and Thailand.
• Empirical fitting of log-periodic power law (LPPL) models to price data during bubble phases to detect accelerating trends with oscillatory corrections.
• Analysis of crash hazard rates derived from the LPPL model to assess criticality linked to collective herding behavior.
• Cross-market comparison to detect anti-bubble patterns in Western indices following crashes in emerging markets.
• Use of statistical validation to confirm LPPL fit quality and significance of detected bubbles.
• Application of the rational expectation model of bubbles and crashes, calibrated by observed market dynamics and behavioral feedback mechanisms.

Experimental results

Research questions

• RQ1 Do log-periodic power law patterns reliably characterize speculative bubbles in emerging Latin-American and Asian stock markets?
• RQ2 To what extent does the rational expectation model of bubbles and crashes, driven by herding behavior, apply to emerging markets?
• RQ3 Are there detectable anti-bubble patterns in Western stock markets following major crashes in emerging markets?
• RQ4 How do crash hazard rates evolve during bubble formation, and what role does collective imitation play in reaching critical thresholds?

Key findings

• Twenty-two significant bubbles were identified across 12 emerging markets, with log-periodic power law signatures providing a strong empirical fit in most cases.
• The LPPL model successfully captured the accelerating price dynamics and oscillatory corrections preceding major market crashes or severe corrections.
• The model's crash hazard rate increased significantly during bubble phases, indicating rising probability of a crash due to herding behavior.
• Three of the identified bubbles were followed by log-periodic anti-bubble patterns in Western markets, consistent with previously documented phenomena in the Nikkei and gold prices.
• The study extends the applicability of the rational expectation model of bubbles and crashes to emerging markets, validating its broader economic relevance.
• The presence of anti-bubbles in Western markets suggests a transatlantic or global transmission mechanism of market instability following emerging market crashes.