Bubbles and crashes in finance: A phase transition from random to deterministic behaviour in prices

Fry, John

Abstract

We develop a rational expectations model of financial bubbles and study ways in which a generic risk-return interplay is incorporated into prices. We retain the interpretation of the leading Johansen-Ledoit-Sornette model, namely, that the price must rise prior to a crash in order to compensate a representative investor for the level of risk. This is accompanied, in our stochastic model, by an illusion of certainty as described by a decreasing volatility function. As the volatility function goes to zero, crashes can be seen to represent a phase transition from stochastic to deterministic behaviour in prices.

Citation

Fry, J. (2010). Bubbles and crashes in finance: A phase transition from random to deterministic behaviour in prices. Journal of Applied Research in Finance, 2(4), 131-137

• Journal Article Type: Article
• Publication Date: 2010
• Deposit Date: Feb 4, 2022
• Journal: Journal of Applied Research in Finance
• Print ISSN: 2066-5482
• Peer Reviewed: Peer Reviewed
• Volume: 2
• Issue: 4
• Pages: 131-137
• Public URL: https://hull-repository.worktribe.com/output/3920969
• Related Public URLs: https://www.ceeol.com/search/article-detail?id=81976