Friday, August 21, 2009

Econophysicist Predicts Date of Chinese Stock Market Collapse--Part II

From MIT's Technology Review:

The Shanghai Composite Index was supposed to burst before 27 July but didn't. A few days after that deadline, however, it dropped by 20 percent. Coincidence?

Last month, we looked at a prediction that the Shanghai Composite stock-market index was about to crash. The forecast was made by a team lead by the econophysicist Didier Sornette at the Swiss Federal Institute of Technology in Zurich, who has made a study of economic bubbles and how they burst.

His thinking is that bubbles are the result of some kind of feedback mechanism that create faster-than-exponential growth. This kind of growth rate is straightforward to measure and so bubbles should be easy to identify.

In July, he and his buddies pointed out that the Shanghai Composite stock-market index was following exactly this kind of trend.

But they also made an extraordinary prediction. They said that this bubble would burst between 17 and 27 July.

That's a very specific prediction of the kind that economists almost never make. How they came to their conclusion wasn't clear and I for one was very sceptical. In fact, I bet he was wrong and promised him an arXivblog t-shirt and baseball cap if the market proved otherwise.

So I kept an eye on the index and on 27 July noted that it was still going strong. In fact, between 17 and 27 July, the index rose by 251 points or about 8 per cent. So much for the crash.

Then something strange happened. On 4 Aug, the market hit a peak of 3471 and then it dropped, dramatically. By 19 Aug it had fallen to 2786, a drop of about 20 percent. >>>MORE