Stochastic modelling for financial bubbles and policy

Fry, John

Abstract

In this paper, we draw upon the close relationship between statistical physics and mathematical finance to develop a suite of models for financial bubbles and crashes. By modifying previous approaches, we are able to derive novel analytical formulae for evaluation problems and for the expected timing of future change points. In particular, we help to explain why previous approaches have systematically overstated the timing of changes in market regime. The list of potential empirical applications is deep and wide ranging, and includes contemporary housing bubbles, the Eurozone crisis and the Crash of 2008.

Citation

Fry, J. (2015). Stochastic modelling for financial bubbles and policy. Cogent Economics and Finance, 3(1), Article 1002152. https://doi.org/10.1080/23322039.2014.1002152

• Journal Article Type: Article
• Acceptance Date: Dec 18, 2014
• Online Publication Date: Jan 30, 2015
• Publication Date: 2015-01
• Deposit Date: Feb 4, 2022
• Publicly Available Date: Feb 9, 2022
• Journal: Cogent Economics and Finance
• Publisher: Taylor & Francis
• Peer Reviewed: Peer Reviewed
• Volume: 3
• Issue: 1
• Article Number: 1002152
• DOI: https://doi.org/10.1080/23322039.2014.1002152
• Keywords: Econophysics; Bubbles; Crashes; Expected crash-time
• Public URL: https://hull-repository.worktribe.com/output/3920999