Study: possible to predict stock market crashes
The most obvious way to predict a stock market crash is to find out when I go all in. But there may be another, says New Scientist:
Now a team of physicists and financiers have bucked the trend by successfully predicting a steep fall in the Shanghai Stock Exchange. … The idea is that if a plot of the logarithm of the market’s value over time deviates upwards from a straight line, it’s a clear warning that people are investing simply because the market is rising rather than paying heed to the intrinsic worth of companies. By projecting the trend, the team can predict when growth will become unsustainable and the market will crash.
Sornette, Zhou and colleagues applied their model to the Shanghai Composite Index, which tracks the combined worth of all companies listed on the Shanghai Stock Exchange, the world’s second largest. Early this year, the index gained 50 per cent in just four months. In July, the team predicted that the index would start to fall sharply by 10 August. The index duly began to slide on 4 August, falling almost 20 per cent in the subsequent two weeks.
Me: I assume this would also work with individual stocks. Econophysicist Didier Sornette has a paper that puts his approach in a bit more context.