Market crashes as critical phenomena? Explanation, idealization, and universality in econophysics
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We study the Johansen–Ledoit–Sornette (JLS) model of financial market crashes (Johansen et al. in Int J Theor Appl Financ 3(2):219–255, 2000). On our view, the JLS model is a curious case from the perspective of the recent philosophy of science literature, as it is naturally construed as a “minimal model” in the sense of Batterman and Rice (Philos Sci 81(3):349–376, 2014) that nonetheless provides a causal explanation of market crashes, in the sense of Woodward’s interventionist account of causation (Woodward in Making things happen: a theory of causal explanation. Oxford University Press, Oxford, 2003).
KeywordsJohansen–Ledoit–Sornette model Econophysics Renormalization group Minimal models Explanation Universality Infinite idealization
This paper is partially based upon work supported by the National Science Foundation under Grant No. 1328172. Previous versions of this work have been presented at the at a workshop on the Physics of Society and a conference on Infinite Idealizations, both hosted by the Munich Center for Mathematical Philosophy; we are grateful to the audiences and organizers for helpful feedback. We are also grateful to Didier Sornette for helpful discussions concerning his work and for detailed feedback on a previous draft of the paper, to Alexander Reutlinger for detailed comments on an earlier draft, and to two anonymous referees for their helpful comments.
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