Didier Sornette, a risk economist and expert on complex systems, Sornette is the chair of entrepreneurial risk at the Swiss Federal Institute of Technology, and director of the Financial Crisis Observatory, a project to test the hypothesis that markets can be predictable. He’s the author of Why Stock Markets Crash: Critical Events in Complex Financial Systems.I recommend everyone to watch out the video before continuing into getting know more about the bubble prediction.
Download the white paper Dragon Kings, Black Swans and the Prediction of Crises
Sensex – Shorter Term Bubble Analysis
How Bubble is Predicted
In a bubble, the dominant mechanism is positive feedback; the key to understanding bubbles is understanding this positive feedback. How, then, does positive feedback arise?
The most obvious explanation is the conventional one: positive feedback is a consequence of irrationality in the market. And there’s certainly an element of truth in this explanation. Greed, self-delusion, unjustified extrapolation, caring more about relative returns than absolute profits (a.k.a. “keeping up with the Joneses”), conformism (a.k.a. “if everybody else is doing it why can’t we?”), confusing the improbable with the impossible (“house prices will never go down nation-wide”) and other persistent behavioral flaws lead inevitably to bubbles. This has been true throughout the history of speculation.
FCO ofen tracks the Power Law, Positive feedback and other mechanisms to identify a bubble aka (Super Exponential Growth)
The Bubble is predicted based on the positive feedback
A positive value of the DS-LPPL bubble indicator suggests a future drop and/or higher volatility.
A negative value of the DS-LPPL bubble indicator suggests a rebound and/or higher volatility.
Four indicators are offered in Risikopedia(FCO)
1)early bubble warning, long time scale
2)bubble end flag, long time scale
3)early bubble warning, short time scale
4)bubble end flag, short time scale
Short time scale corresponds to 1month to 6 months.
Long time scale corresponds to 6 months to 3 years.
Where i can see this DS-LPPL Indicator?
Financial Crisis Observatory Provides such Analysis in their Risikopedia Section for various class of Financial Instruments like Global Indices(Includes Sensex too), Commodities and US Sectoral Indices and Selected US Large Cap Stocks.
Long Term Bubble Prediction in Apple from FCO
Possibly Gold Bear Market Ends?
Extreme negative Values in DS LPPL confidence Indicator indicates that possible reversal in Gold (Both Long Term and Short Term shows extreme negative values)