Summary
Using a parsimonious autoregressive process with long-range. memory defined on the logarithm of the volatility, we predict strikingly different response functions of the volatility to external shocks compared with endogenous shocks. These predictions are validated empirically on data from a hierarchy of volatility shocks, on major crashes and finally on major external disturbances such as the events of Sept. 11, 2001 and the coup against Gorbachev on Aug., 19, 1991. Our theory allows us to classify unambiguously these different events in two classes (endogenous and exogenous) with specific signatures for both and characteristic precursors for the endogenous class. It also explains the origin of endogenous shocks as the coherent accumulations of tiny bad news, and thus unify all previous explanations of large crashes including Oct. 1987.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsPreview
Unable to display preview. Download preview PDF.
References
Mikhailov AS, Calenhuhr V (2002) From cells to societies. Springer, Berlin Heidelberg New York
Barro RJ, EF Fama, DR Fischel, AH Meltzer, R Roll and LC Telser (1989) Black monday and the future of financial markets, edited by Kamphuis RW Jr., RC Kormendi and JWH Watson. Mid American Institute for Public Policy Research Inc. and Dow,Janes-Irwin Inc..
Orléan A. (1989) Mimetic contagion and speculative bubbles, “Theory and Decision 27: 63–92.
Johansen A and Sornette D (1999).Critical Crashes, Risk 12: 91–94.
Shiller Ri (2000) Irrational exuberance. Princeton University Press, Princeton NJ.
Sornette D and A Johansen (2001) Significance of log-periodic precursors to financial crashes, Quantitative Finance 1: 452–471.
Camerer C (1989) Bubbles and Fads in Asset Prices, Journal of Economic Surveys 3: 3–41.
Adam MC and A Szalarz (1992) Speculative Bubbles and Financial Markets, Oxford Economic Papers 44: 626 640.
Feigenbaum JA (2001) A statistical analysis of lag-periodic precursors to financial crashes, Quantitative Finance 1: 346–360.
Sornette D and JV Andersen (2002) A Nonlinear Super-Exponential Rational Model of Speculative Financial Bubbles, Int. J. Mod. Phys. C 13: 171–188.
Johansen A and Sornette D (2002) Endogenous versus Exogenous Crashes in Financial Markets, submitted to the Journal of Economic Dynamics and Control (http://arXiv.org/abs/cond-mat/0210509/abs/cond-mat/0210509)
White EN (1996) Stock market crashes and speculative manias. In The international library of macroeconomic and financial history, 13. An Elgar Reference Collection, Cheltenham, UK; Brookfield, US.
Sornette D, Malevergne Y and Muzy JF (2003) What causes crashes? Risk 16: 67–71.
Sornette D and Helmstetter A (2003) Endogeneous Versus Exogeneous Shocks in Systems with Memory, Physica A 318: 577–591.
Helmstetter A, Sornette D and Grasso JR (2003) Mainshocks are Aftershocks of Conditional Fbreshocks: How do foreshock statistical properties emerge from aftershock laws, J. Ceophys. Res., 108 (B1), 2046, doi:10.1029/2002JB001991.
Ding Z, Oranger CWJ and Engle R (1993) A long memory property of stock returns and a new model, Journal of Empirical Finance 1: 83–106.
Ding Z, Granger CWJ (1996) Modeling volatility persistence of speculative returns: A new approach, Journal of Econometrics 73: 185–215.
Arneodo A, Muzy JF and Sornette D (1998) Direct causal cascade in the stock market, The European physical Journal B 2: 277–282.
Granger CWJ and Ding Z (1996) Varieties of long memory models, Journal of Econometrics 73: 61–77.
Baillie RT (1996) Long memory processes and fractional integration in econometrics, Journal of Econometrics 73: 5–59.
Müller LIA, Dacorogna MM, Davé RD, Olsen RB, Pictet OV and von Weizsucker JE (1997) Volatilities of Different Time Resolutions - Analyzing the Dynamics of Market Components, Journal of Empirical Finance 4: 213–240.
Muzy JF, Detour J and Bacry E (2000) Modelling fluctuations of financial time series: from cascade process to stochastic volatility model, The European physical Journal B 17: 537–548.
Muzy JF, Sornette D, Delour J and Arneodo A (2001) Multifractal returns and Hierarchical Portfolio Theory, Quantitative Finance 1: 131–148.
Mandelbrot BB (1997) Fractals and scaling in finance: discontinuity, conccontration, risk. selecta volume E, Springer New York.
Bacry E, Delour J and Muzy JF (2001) Multifractal random walk, Physical Review E 64: 026103.
Lillo F and Mantegna RN (2001) Omori law after a financial market crash, preprint cond-mat/0111257.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2004 Springer Japan
About this paper
Cite this paper
Sornette, D., Malevergne, Y., Muzy, JF. (2004). Volatility Fingerprints of Large Shocks: Endogenous Versus Exogenous. In: Takayasu, H. (eds) The Application of Econophysics. Springer, Tokyo. https://doi.org/10.1007/978-4-431-53947-6_12
Download citation
DOI: https://doi.org/10.1007/978-4-431-53947-6_12
Publisher Name: Springer, Tokyo
Print ISBN: 978-4-431-67961-5
Online ISBN: 978-4-431-53947-6
eBook Packages: Springer Book Archive