Real-time prediction and post-mortem analysis of the Shanghai 2015 stock market bubble and crash

Abstract

ABSTRACT The authors assess the performance of the real-time diagnostic, available to the public on the website of the Financial Crisis Observatory (FCO) at ETH Zürich, of the bubble regime that began developing in Chinese stock markets in mid-2014 and started to burst in June 2015. The analysis is based on (i) the economic theory of rational expectation bubbles; (ii) the behavioral mechanisms of imitation and the herding of investors and traders; and (iii) the mathematical formulation of the log-periodic power lawsingularity (LPPLS), which describes the critical approach toward a tipping point in complex systems. The authors document how the real-time predictions were presented in the automated analysis of the FCO, as well as in their FCO Cockpit report of June 2015. A complementary post-mortem analysis of the nature and value of the LPPLS methodology in diagnosing the Shanghai Composite Index bubble and its termination is also given.