Tuesday, July 11, 2017

ETH Zurich: "Didier Sornette's Supercomputer Is Betting On A Market Crash"

We've visited the good Professor a few times over the years but got bored. (actually I called him a flake)
And now we're back.

Via ZeroHedge, July 10:
From FinancialSense.com,
One of the world's most powerful supercomputers, retrofitted for trading the stock market, appears to be betting on a crash in the months ahead.

The Financial Crisis Observatory (FCO) at ETH Zurich released its latest Global Bubble Status Report on July 1st.

As we discussed with FCO’s director, Didier Sornette, on our podcast in May, they use one of the world’s leading supercomputers to monitor global markets each day for two distinct bubble-like characteristics: faster than exponential price movement and accelerating oscillations .
[ZH: We first discussed Sornette's work in 2010 on identifying "critical market crashes", and again in 2013 when Sornette explained "how we can predict the next financial crisis" to a TED audience...
The 2007-2008 crash seemed to come out of nowhere, with no source or group to take responsibility, an unpredictable one-time anomaly — as Sornette calls it: “the wrath of God.” But as he says firmly: Despite what standard risk management tools show, these outliers operate under special mechanisms that make them predictable, perhaps even controllable. Sornette and his team at the Financial Crisis Observatory (FCO) call these special cases “dragon-kings.” Dragon-kings, in direct contrast with “black swans,” are at the core characterized by a slow maturation of instability, which move toward a bubble, until the bubble reaches a climax and bursts.

There are many early warning signs of dragon-kings, but one of the crucial ones is super-exponential growth. Super-exponential growth is trenchant and unsustainable and can be found in many areas of study to predict dragon-kings. Sornette has applied it to Ariane rockets, parturition problems, epilepsy, landslides, even blockbuster movies and YouTube virality.

Dragon-king theory can be applied to 30 years of financial bubble history, starting with the worldwide bubble that started in 1980 and popped in 1987, and ending in the most recent global over-valuation bubble that broke in 2007 and 2008. In December 2007 Sornette predicted the Chinese market bubble, to the disbelief of analysts. Three weeks after his presentation the markets lost 20 percent, and by the end of the year they had lost 70 percent.

Can the dragons be slain? In a way. Learn the art of planning and predicting, says Sornette. If we find pockets of predictability, advanced diagnostics of crises are possible. So that crises may never again take us by such surprise.]
*  *  *
Sornette's July report notes an increasing trend of positive bubbles across multiple asset classes.
Here’s what they say in their “big picture” section:
“One can observe the continuation of a trend in the growth of positive bubbles in the fixed income asset class for the second month. The fraction of stocks diagnosed in a positive bubble state increased this month to exceed 36% compared with 32% last month. Mixed bubble signals still occur only in few commodity indices. We also observe renewed bubble activity in currency pairs.” [source]
Here is the chart where they show the “historical evolution of the fraction of assets within an asset class that show significant bubble signals”:
A positive bubble signal is an indication of herding when people start buying because prices go up. A negative bubble signal is an indication of herding when people start selling because prices go down....
...MORE, including video

It looks as though we haven't stopped in on Didier and the gang since 2014:

Financial Crisis Observatory: Global Bubble Status Report--Oct. 1, 2014
From Didier Sornette and ETH Zurich*:
 The Financial Crisis Observatory (FCO) is a scientific platform aimed at testing and quantifying rigorously, in a systematic way and on a large scale the hypothesis that financial markets exhibit a degree of inefficiency and a potential for predictability, especially during regimes when bubbles develop. 
*Swiss Federal Institute, Zürich

FCO homepage
Status report 21 page PDF
And August 2014:

...The Honest Broker for the Week of August 16, 2014
Using valuation measures for market timing doesn't work so we're left with stuff like Zürich's Didier Sornette's thinking, links after the jump. Quick spoiler: no crash this month....
(he said with 14 days to go)

...In 2013's "UPDATED--Commodities and High Frequency Trading: Prices Being Driven By Price Moves Rather Than Fundamentals" after I called him a flake we linked to Sornette's "Quantification of the High Level of Endogeneity and of Structural Regime Shifts in Commodity Markets" (56 page PDF)

That post also linked back to:
Econophysicist Predicts Date of Chinese Stock Market Collapse--Part II
Forecasting Financial Crashes: The Ultimate Experiment Begins
And FT Alphaville's wonderfully titled "Dragon-king of the outlier events".

See also:
"The Illusion of the Perpetual Money Machine"
Innovation as a Social Bubble: The Example of the Human Genome Project

Here's his latest via SSRN:
Power Law Scaling and "Dragon-Kings'' in Distributions of Intraday Financial Drawdown

And via Google News:
"Didier Sornette: Wir sprechen von Blasen, wenn wir ...
Ad-Hoc-News (Pressemitteilung)-Aug 8, 2014
€uro am Sonntag: Herr Sornette, wie definieren Sie eine Blase? Didier Sornette: Wir sprechen von Blasen, wenn wir superexponentielles ...

And more at his ETH Zürich Chair of Entrepreneurial Risks homepage