A joint study by academics in Switzerland, Germany and at Boston University sheds new light on the formation of financial bubbles and crashes. Wild fluctuations in stock prices caused by bubbles bursting have had a dramatic impact on the world economy and the personal fortunes of millions of us in the last few years.
The study "Switching processes in financial markets" will be published in the Proceedings of the National Academy of Sciences on May 10 and reveals a general empirical law quantifying market behavior near bubbles and crashes—these are either price lows where the share price falls before starting to rise again or price highs where the price peaks before falling.
"We asked whether or not there are regularities either just before or just after market highs and lows", says lead researcher Dr. Tobias Preis of the Swiss Federal Institute of Technology in Zurich, who specializes in analyzing and modeling financial markets. Preis is also at the Center for Polymer Studies at Boston University.
This study involved synchronizing more than 2.6 billion transactions which occurred at the European Exchange (EUREX) in Germany and at the New York Stock Exchange (NYSE) in the U.S. Preis and his fellow authors Dr. Johannes J. Schneider at the Johannes Gutenberg University Mainz and Prof. H. Eugene Stanley, also at Boston University, analyzed microtrends and macrotrends in financial markets using three fluctuating quantities: the price of each transaction, the transaction volume, and the time between individual transactions.
"We applied our methodology to local highs and local lows in the price on very different time scales ranging from milliseconds to 100 days," says Stanley. What the researchers find is that there is a unique empirical law near bubbles and crashes, or trend changes quantifying both transaction volume and time between transactions in all the financial markets analyzed. "Even more surprising," says Preis, "we find that this empirical law with a unique parameter is valid for very small bubbles as well as for huge bubbles." In other words, the formation of bullish and bearish trends does not depend on the time scale. The well known catastrophic bubbles that occur over large time scales, such as the global financial crashes of 1929 and 2008, are not outliers. "We found the blueprint of financial trends," summarizes Preis and concludes: "We can learn from the large number of tiny bubbles how huge market bubbles emerge and burst. The challenge is to destroy bubbles before they become huge."
The importance of these findings is echoed by Dirk Helbing, professor of sociology at the Swiss Federal Institute of Technology. Helbing leads the FuturICT Flagship project, which intends to unify the best scientists in a 10-year program of the European Union to explore social life on earth and everything it relates to. "One ultimate goal of the FuturICT project is to manage challenges that make the modern world so difficult to predict, including financial crises. The discovery by Tobias Preis and his colleagues may be of crucial importance for the financial and economic crisis observatory that this flagship project will create."
The blueprint of bubbles and crashes is also the subject of a feature article in the May issue of Physics World (Tobias Preis and H. Eugene Stanley, "Bubble trouble," Physics World 24, 29-32 2011)Contact:
About the Center for Polymer Studies at Boston University—The Center for Polymer Studies (CPS) is a scientific visualization research center in the Physics Department and Science and Mathematics Education Center at Boston University. CPS is devoted to interdisciplinary research in aspects of polymer, random, and fractal systems and applies its our expertise in this area to develop experimental and computational materials for high school and undergraduate education.
About Boston University—Founded in 1839, Boston University is an internationally recognized institution of higher education and research. With more than 30,000 students, it is the fourth largest independent university in the United States. BU contains 17 colleges and schools along with a number of multi-disciplinary centers and institutes which are central to the school's research and teaching mission.
Dr. Tobias Preis | EurekAlert!
Blockchain Set to Transform the Financial Services Market
28.09.2016 | HHL Leipzig Graduate School of Management
Paper or plastic?
08.07.2016 | University of Toronto
Researchers from the Institute for Quantum Computing (IQC) at the University of Waterloo led the development of a new extensible wiring technique capable of controlling superconducting quantum bits, representing a significant step towards to the realization of a scalable quantum computer.
"The quantum socket is a wiring method that uses three-dimensional wires based on spring-loaded pins to address individual qubits," said Jeremy Béjanin, a PhD...
In a paper in Scientific Reports, a research team at Worcester Polytechnic Institute describes a novel light-activated phenomenon that could become the basis for applications as diverse as microscopic robotic grippers and more efficient solar cells.
A research team at Worcester Polytechnic Institute (WPI) has developed a revolutionary, light-activated semiconductor nanocomposite material that can be used...
By forcefully embedding two silicon atoms in a diamond matrix, Sandia researchers have demonstrated for the first time on a single chip all the components needed to create a quantum bridge to link quantum computers together.
"People have already built small quantum computers," says Sandia researcher Ryan Camacho. "Maybe the first useful one won't be a single giant quantum computer...
COMPAMED has become the leading international marketplace for suppliers of medical manufacturing. The trade fair, which takes place every November and is co-located to MEDICA in Dusseldorf, has been steadily growing over the past years and shows that medical technology remains a rapidly growing market.
In 2016, the joint pavilion by the IVAM Microtechnology Network, the Product Market “High-tech for Medical Devices”, will be located in Hall 8a again and will...
'Ferroelectric' materials can switch between different states of electrical polarization in response to an external electric field. This flexibility means they show promise for many applications, for example in electronic devices and computer memory. Current ferroelectric materials are highly valued for their thermal and chemical stability and rapid electro-mechanical responses, but creating a material that is scalable down to the tiny sizes needed for technologies like silicon-based semiconductors (Si-based CMOS) has proven challenging.
Now, Hiroshi Funakubo and co-workers at the Tokyo Institute of Technology, in collaboration with researchers across Japan, have conducted experiments to...
14.10.2016 | Event News
14.10.2016 | Event News
12.10.2016 | Event News
21.10.2016 | Health and Medicine
21.10.2016 | Information Technology
21.10.2016 | Materials Sciences