ENBIS-16 in Sheffield

11 – 15 September 2016; Sheffield Abstract submission: 20 March – 4 July 2016

Modelling Bubbles and Crashes: Applications to Bitcoin and to Trading

13 September 2016, 10:10 – 10:30

Abstract

Submitted by
John Fry
Authors
John Fry (Sheffield Business School)
Abstract
We consider a stochastic or second-order extension of the seminal Johansen-Ledoit-Sornette model. During a bubble prices spike upwards. This behaviour can be described mathematically by a temporary increase in the drift function and a temporary decrease in the volatility function. The process is closely related to phase-transition phenomena in statistical physics and reflects an interesting overlap between physics and finance. Financially this reflects a collective market over-confidence and the fact that looking only at the historical price record is liable to under-estimate the true level of risk involved. We illustrate our model with financially interesting applications to Bitcoin and to the development of long-term trading strategies for stocks.
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