From Tulip Mania (1637) to the Subprime Crisis (2008), each
market crash has cost investors a huge fortune. Inevitably, it also has led to a period of economic
recession/ depression. There are many
theories that attempt to explain the causes of the crash but not many could
predict the crash ex-ante timely.
Didier Sornette, Professor of the Chair of Entrepreneurial
Risks, also a Physicist and an Earth Scientist at the Swiss Federal Institute
of Technology Zurich (ETH Zurich), has combined economic theory, behavioural
finance and earth science physics, to create a model in predicting financial
bubbles, namely log-periodic power law singularity (LPPLS).
The LPPLS model successfully predicted the 2008 Oil Bubble (Read more here), 2015 Shanghai Stock
Market Crash (Read more
here) and 2016 minor Bond Market Crash.
According to his September 2017 report (Read
more here), there is a growing risk of fixed income bubble whereas the
chances of an equity market crash is easing somewhat(See below chart). However, the September report only covered up
to August data, thus it did not factor in the September rally where S&P 500
surpassed 2500 level.
Picture source: http://www.er.ethz.ch/financial-crisis-observatory.html
We love to wait for his October report to see where the
equity market is heading!
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