Tuesday, January 20, 2015

"Predicting economic market crises using measures of collective panic"

Wow, I wonder if Falky (mimicry theory of recessions) knows about this paper: "Predicting economic market crises using measures of collective panic" [pdf]? Abstract:

"Panic may be due to a specific external threat, or self-generated nervousness. Here we show that the recent economic crisis and earlier large single-day panics were preceded by extended periods of high levels of market mimicry — direct evidence of uncertainty and nervousness, and of the comparatively weak influence of external news. High levels of mimicry can be a quite general indicator of the potential for self- organized crises."
This reminds me of Prechter's theory of endogenous causation. The paper goes on,
"[E]ven when price changes are small, we expect that co-movement itself is the collective behavior that is characteristic of panic, or panicky behavior that precedes a panic. Thus, rather than measuring volatility or correlation, we measure the fraction of stocks that move in the same direction. We find that this increases well before the market crash, and there is significant advance warning to provide a clear indicator of an impending crash."
And, speaking of the Chicago Spire condo tower mentioned in our mimicry post, that ludicrous project has been cancelled.

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