Catalogue


Why stock markets crash [electronic resource] : critical events in complex financial systems /
Didier Sornette.
imprint
Princeton, N.J. : Princeton University Press, c2003.
description
xx, 421 p. : ill.
ISBN
0691096309 (alk. paper)
format(s)
Book
More Details
added author
imprint
Princeton, N.J. : Princeton University Press, c2003.
isbn
0691096309 (alk. paper)
restrictions
Licensed for access by U. of T. users.
catalogue key
8848886
 
Includes bibliographical references (p. 397-418) and index.
A Look Inside
Full Text Reviews
Appeared in Publishers Weekly on 2003-01-02:
It's everybody's favorite topic of conversation at the moment: why did the Dow and the Nasdaq tank so horrifically, and where did all the money go? UCLA professor Sornette does his best to tackle those questions. While CNBC anchor Ron Insana's recent Trend Watching took a reader-friendly look at the history of market bubbles, Sornette's approach is decidedly different. Befitting his status as an expert in geophysics, the author loads the text with enough charts, graphs and advanced economic theory to choke John Kenneth Galbraith (one chapter subheading, for instance, is "The Origin of Log-Periodicity in Hierarchical Systems"). It's a meaty book, with helpful autopsies of past crashes ranging from tulip mania in the Netherlands to the Nasdaq crash of April 2000, as well as information on how crashes might be predicted in the future. Unfortunately for the average investor who tends to get burned after these bubbles, Sornette's conclusion is that a mixture of "systemic instability" and plain old human greed means that market bubbles aren't about to disappear anytime soon. And neither, of course, will the subsequent crashes. (Jan.) (c) Copyright PWxyz, LLC. All rights reserved
Reviews
Review Quotes
Why Stock Markets Crashaddresses a current and enduring concern for all investors, the seemingly mysterious twists and turns the markets take. Didier Sornette's insights into why markets behave as they do are fresh, productive, and provocative. This work is bound to become an important baseline for anyone trying to understand what will happen next in the stock and currency markets not only in the U.S. but in Europe and Asia as well. It is well written and accessible to non technical audiences.
"While its difficult to pinpoint what type of trader would enjoy this book the most, I think theres something for everyone, whether youre a quaint, technical trader or a fundamentalist. . . . I feel that Im smarter after finishing this book; I thoroughly enjoyed the lengthy journey, and would recommend this to any stock market enthusiast."-- Jeff Pierce, Seeking Alpha
The book is written in a readable style and does not require technical knowledge. Any reader interested in a serious approach to the origin and possible prediction of financial bubbles will enjoy reading it.
"The book is written in a readable style and does not require technical knowledge. Any reader interested in a serious approach to the origin and possible prediction of financial bubbles will enjoy reading it."-- Josep M. Porra, Journal of Statistical Physics
"Sornette is both a statistical physicist and a member of a new breed of scientist: the econophysicist. . . . But Sornette's book is not just about finance and economics; it is also a mesmerizing introduction to game theory, fractals, catastrophe theory, critical phenomena, and much more. No prior knowledge of finance or economics is needed to understand the book. . . . Throughout the book, Sornette makes numerous, vivid comparisons with many other fields in which the various mathematical tools he describes can be applied."-- Frank Cuypers, Physics Today
Sornette is both a statistical physicist and a member of a new breed of scientist: the econophysicist. . . . But Sornette's book is not just about finance and economics; it is also a mesmerizing introduction to game theory, fractals, catastrophe theory, critical phenomena, and much more. No prior knowledge of finance or economics is needed to understand the book. . . . Throughout the book, Sornette makes numerous, vivid comparisons with many other fields in which the various mathematical tools he describes can be applied.
"A highly recommended, enjoyable, well-researched, and thought-provoking book for anyone interested in stock markets and the modeling of financial processes."-- Rick Gorvett, Journal of Risk and Insurance
A highly recommended, enjoyable, well-researched, and thought-provoking book for anyone interested in stock markets and the modeling of financial processes.
This item was reviewed in:
Publishers Weekly, January 2003
To find out how to look for other reviews, please see our guides to finding book reviews in the Sciences or Social Sciences and Humanities.
Summaries
Bowker Data Service Summary
Didier Sornette boldly applies his varied experience in many areas to propose a simple, powerful, and general theory of how, why, and when stock markets crash.
Main Description
The scientific study of complex systems has transformed a wide range of disciplines in recent years, enabling researchers in both the natural and social sciences to model and predict phenomena as diverse as earthquakes, global warming, demographic patterns, financial crises, and the failure of materials. In this book, Didier Sornette boldly applies his varied experience in these areas to propose a simple, powerful, and general theory of how, why, and when stock markets crash. Most attempts to explain market failures seek to pinpoint triggering mechanisms that occur hours, days, or weeks before the collapse. Sornette proposes a radically different view: the underlying cause can be sought months and even years before the abrupt, catastrophic event in the build-up of cooperative speculation, which often translates into an accelerating rise of the market price, otherwise known as a "bubble." Anchoring his sophisticated, step-by-step analysis in leading-edge physical and statistical modeling techniques, he unearths remarkable insights and some predictions--among them, that the "end of the growth era" will occur around 2050. Sornette probes major historical precedents, from the decades-long "tulip mania" in the Netherlands that wilted suddenly in 1637 to the South Sea Bubble that ended with the first huge market crash in England in 1720, to the Great Crash of October 1929 and Black Monday in 1987, to cite just a few. He concludes that most explanations other than cooperative self-organization fail to account for the subtle bubbles by which the markets lay the groundwork for catastrophe. Any investor or investment professional who seeks a genuine understanding of looming financial disasters should read this book. Physicists, geologists, biologists, economists, and others will welcome Why Stock Markets Crash as a highly original "scientific tale," as Sornette aptly puts it, of the exciting and sometimes fearsome--but no longer quite so unfathomable--world of stock markets.
Back Cover Copy
"A professor of geophysics gives a very different perspective, informed by his scientific training, on the stock market. I am sure that his view will be highly controversial, but the book is fascinating, and mind-expanding, reading."-- Robert Shiller, author of Irrational Exuberance " Why Stock Markets Crash addresses a current and enduring concern for all investors, the seemingly mysterious twists and turns the markets take. Didier Sornette's insights into why markets behave as they do are fresh, productive, and provocative. This work is bound to become an important baseline for anyone trying to understand what will happen next in the stock and currency markets not only in the U.S. but in Europe and Asia as well. It is well written and accessible to non technical audiences."-- Richard N. Foster, Director, McKinsey & Company "This is a most fascinating book about an intriguing but also a controversial topic. It is written by an expert in a very straightforward style and is illustrated by many clear figures. Why Stock Markets Crash will surely raise scientific interest in the emerging new field of econophysics."-- Cars H. Hommes, Director of the Center for Nonlinear Dynamics in Economics and Finance, University of Amsterdam "In turbulent times for financial markets, more books than usual are published on such subjects as financial crashes. This book is different. First, it is written by an internationally recognized expert in non-linear, complex systems. Second, it promotes some new ideas in both finance and science. In addition, it offers the general reader an insight into finance, both practical and academic, as well as some of the issues at the cutting edge of science. What more could one ask for?"-- Neil F. Johnson, Department of Physics and Oxford Center for Computational Finance, Oxford University "In turbulent times for financial markets, more books than usual are published on such subjects as financial crashes. This book is different. First, it is written by an internationally recognized expert in non-linear, complex systems. Second, it promotes some new ideas in both finance and science. In addition, it offers the general reader an insight into finance, both practical and academic, as well as some of the issues at the cutting edge of science. What more could one ask for?"-- Neil F. Johnson, Department of Physics and Oxford Center for Computational Finance, Oxford University
Back Cover Copy
"A professor of geophysics gives a very different perspective, informed by his scientific training, on the stock market. I am sure that his view will be highly controversial, but the book is fascinating, and mind-expanding, reading."--Robert Shiller, author ofIrrational Exuberance "Why Stock Markets Crashaddresses a current and enduring concern for all investors, the seemingly mysterious twists and turns the markets take. Didier Sornette's insights into why markets behave as they do are fresh, productive, and provocative. This work is bound to become an important baseline for anyone trying to understand what will happen next in the stock and currency markets not only in the U.S. but in Europe and Asia as well. It is well written and accessible to non technical audiences."--Richard N. Foster, Director, McKinsey & Company "This is a most fascinating book about an intriguing but also a controversial topic. It is written by an expert in a very straightforward style and is illustrated by many clear figures.Why Stock Markets Crashwill surely raise scientific interest in the emerging new field of econophysics."--Cars H. Hommes, Director of the Center for Nonlinear Dynamics in Economics and Finance, University of Amsterdam "In turbulent times for financial markets, more books than usual are published on such subjects as financial crashes. This book is different. First, it is written by an internationally recognized expert in non-linear, complex systems. Second, it promotes some new ideas in both finance and science. In addition, it offers the general reader an insight into finance, both practical and academic, as well as some of the issues at the cutting edge of science. What more could one ask for?"--Neil F. Johnson, Department of Physics and Oxford Center for Computational Finance, Oxford University "In turbulent times for financial markets, more books than usual are published on such subjects as financial crashes. This book is different. First, it is written by an internationally recognized expert in non-linear, complex systems. Second, it promotes some new ideas in both finance and science. In addition, it offers the general reader an insight into finance, both practical and academic, as well as some of the issues at the cutting edge of science. What more could one ask for?"--Neil F. Johnson, Department of Physics and Oxford Center for Computational Finance, Oxford University
Table of Contents
Prefacep. xiii
Financial Crashes: What, How, Why, And When?p. 3
What Are Crashes, and Why Do We Care?p. 3
The Crash of October 1987p. 5
Historical Crashesp. 7
The Tulip Maniap. 7
The South Sea Bubblep. 9
The Great Crash of October 1929
Extreme Events in Complex Systemsp. 15
Is Prediction Possible? A Working Hypothesisp. 20
Fundamentals of Financial Marketsp. 26
The Basicsp. 27
Price Trajectoriesp. 27
Return Trajectoriesp. 30
Return Distributions and Return Correlationp. 33
The Efficient Market Hypothesis and the Random Walkp. 38
The Random Walkp. 38
A Parable: How Information Is Incorporated in Prices, Thus Destroying Potential "Free Lunches"p. 42
Prices Are Unpredictable, or Are They?p. 45
Risk-Return Trade-Offp. 47
Financial Crashes Are "Outliers"p. 49
What Are "Abnormal" Returns?p. 49
Drawdowns (Runs)p. 51
Definition of Drawdownsp. 51
Drawdowns and the Detection of "Outliers"p. 54
Expected Distribution of "Normal" Drawdownsp. 56
Drawdown Distributions of Stock Market Indicesp. 60
The Dow Jones Industrial Averagep. 60
The Nasdaq Composite Indexp. 62
Further Testsp. 65
The Presence of Outliers Is a General Phenomenonp. 69
Main Stock Market Indices, Currencies, and Goldp. 70
Largest U.S. Companiesp. 73
Synthesisp. 75
Symmetry-Breaking on Crash and Rally Daysp. 76
Implications for Safety Regulations of Stock Marketsp. 77
Positive Feedbacksp. 81
Feedbacks and Self-Organization in Economicsp. 82
Hedging Derivatives, Insurance Portfolios, and Rational Panicsp. 89
"Herd" Behavior and "Crowd" Effectp. 91
Behavioral Economicsp. 91
Herdingp. 94
Empirical Evidence of Financial Analysts 'Herding'p. 96
Forces of Imitationp. 99
It Is Optimal to Imitate When Lacking Informationp. 99
Mimetic Contagion and the Urn Modelsp. 104
Imitation from Evolutionary Psychologyp. 106
Rumorsp. 108
The Survival of the Fittest Ideap. 111
Gambling Spiritsp. 112
"Anti-Imitation" and Self-Organizationp. 114
Why It May Pay to Be in the Minorityp. 114
El-Farol's Bar Problemp. 115
Minority Gamesp. 117
Imitation versus Contrarian Behaviorp. 118
Cooperative Behaviors Resulting from Imitationp. 121
The Ising Model of Cooperative Behaviorp. 122
Complex Evolutionary Adaptive Systems of Boundedly Rational Agentsp. 130
Modeling Financial Bubbles and Market Crashesp. 134
What Is a Model?p. 134
Strategy for Model Construction in Financep. 135
Basic Principlesp. 135
The Principle of Absence of Arbitrage Opportunityp. 136
Existence of Rational Agentsp. 137
"Rational Bubbles" and Goldstone Modes of the Price "Parity Symmetry" Breakingp. 139
Price Parity Symmetryp. 140
Speculation as Spontaneous Symmetry Breakingp. 144
Basic Ingredients of the Two Modelsp. 148
The Risk-Driven Modelp. 150
Summary of the Main Properties of the Modelp. 150
The Crash Hazard Rate Drives the Market Pricep. 152
Imitation and Herding Drive the Crash Hazard Ratep. 155
The Price-Driven Modelp. 162
Imitation and Herding Drive the Market Pricep. 162
The Price Return Drives the Crash Hazard Ratep. 164
Risk-Driven versus Price-Driven Modelsp. 168
Hierarchies, Complex Fractal Dimensions, and Log-Periodicityp. 172
Critical Phenomena by Imitation on Hierarchical Networksp. 173
The Underlying Hierarchical Structure of Social Networksp. 173
Critical Behavior in Hierarchical Networksp. 177
A Hierarchical Model of Financial Bubblesp. 181
Origin of Log-Periodicity in Hierarchical Systemsp. 186
Discrete Scale Invariancep. 186
Fractal Dimensionsp. 188
Organization Scale by Scale: The Renormalization Groupp. 192
Principle and Illustration of the Renormalization Groupp. 192
The Fractal Weierstrass Function: A Singular Time-Dependent Solution of the Renormalization Groupp. 195
Complex Fractal Dimensions and Log-Periodicityp. 198
Importance and Usefulness of Discrete Scale Invariancep. 208
Existence of Relevant Length Scalesp. 208
Predictionp. 209
Scenarios Leading
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