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

Fry, John

Authors

Profile image of John Fry

Dr John Fry J.M.Fry@hull.ac.uk
Senior Lecturer in Applied Mathematics



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