title: The Asian Correction Can Be Quantitatively Forecasted Using a Statistical Model of Fusion-Fission Processes.
abstract: The Global Financial Crisis of 2007-2008 wiped out US$37 trillions across global financial markets, this value is equivalent to the combined GDPs of the United States and the European Union in 2014. The defining moment of this crisis was the failure of Lehman Brothers, which precipitated the October 2008 crash and the Asian Correction (March 2009). Had the Federal Reserve seen these crashes coming, they might have bailed out Lehman Brothers, and prevented the crashes altogether. In this paper, we show that some of these market crashes (like the Asian Correction) can be predicted, if we assume that a large number of adaptive traders employing competing trading strategies. As the number of adherents for some strategies grow, others decline in the constantly changing strategy space. When a strategy group grows into a giant component, trader actions become increasingly correlated and this is reflected in the stock price. The fragmentation of this giant component will leads to a market crash. In this paper, we also derived the mean-field market crash forecast equation based on a model of fusions and fissions in the trading strategy space. By fitting the continuous returns of 20 stocks traded in Singapore Exchange to the market crash forecast equation, we obtain crash predictions ranging from end October 2008 to mid-February 2009, with early warning four to six months prior to the crashes.
authors.affiliation: Division of Physics and Applied Physics, School of Physical and Mathematical Sciences, Nanyang Technological University, 21 Nanyang Link, Singapore 637371, Republic of Singapore.|Complexity Institute, Nanyang Technological University, Block 2 Innovation Centre, Level 2 Unit 245, 18 Nanyang Drive, Singapore 637723, Republic of Singapore.
authors.forename: Boon Kin
authors.initials: BK
authors.lastname: Teh
authors.affiliation: Division of Physics and Applied Physics, School of Physical and Mathematical Sciences, Nanyang Technological University, 21 Nanyang Link, Singapore 637371, Republic of Singapore.|Complexity Institute, Nanyang Technological University, Block 2 Innovation Centre, Level 2 Unit 245, 18 Nanyang Drive, Singapore 637723, Republic of Singapore.
authors.forename: Siew Ann
authors.initials: SA
authors.lastname: Cheong
mesh_terms: D000465:Algorithms; D001208:Asia; D003132:Commerce / Q000191:economics*; D005544:Forecasting; D006801:Humans; D007449:Investments / Q000191:economics; D017059:Models, Econometric; D018803:Models, Economic; D012846:Singapore