Forecasting Financial Extremes: A Network Degree Measure of Super-Exponential Growth.
Investors in stock market are usually greedy during bull markets and scared during bear markets. The greed or fear spreads across investors quickly. This is known as the herding effect, and often leads to a fast movement of stock prices. During such market regimes, stock prices change at a super-exponential rate and are normally followed by a trend reversal that corrects the previous overreaction. In this paper, we construct an indicator to measure the magnitude of the super-exponential growth of stock prices, by measuring the degree of the price network, generated from the price time series. Twelve major international stock indices have been investigated. Error diagram tests show that this new indicator has strong predictive power for financial extremes, both peaks and troughs. By varying the parameters used to construct the error diagram, we show the predictive power is very robust. The new indicator has a better performance than the LPPL pattern recognition indicator.
Banque Pictet & Cie SA, Route des Acacias 60, 1211 Geneva 73, Switzerland.
Wanfeng
W
Yan
Banque Pictet & Cie SA, Route des Acacias 60, 1211 Geneva 73, Switzerland.
Edgar
E
van Tuyll van Serooskerken
D000465:Algorithms; D003132:Commerce / Q000379:methods*; D003198:Computer Simulation; D005544:Forecasting / Q000379:methods; D006801:Humans; D007449:Investments; D018803:Models, Economic