Financial Crisis Observatory
A Financial Crisis Observatory is a scientific platform for quantifying market inefficiency in financial markets.
- Context:
- It publishes FCO Cockpit – Global Bubble Status Reports [1].
- See: Fixed Income Index.
References
2012
- http://www.er.ethz.ch/fco/description
- QUOTE: 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. We focus on financial bubbles and crashes, as they constitute the most momentous and revealing financial events that have extraordinarily important impacts and consequences at all levels of the economic spectrum. Our research combines the theory of out-out-equilibrium physical systems, the theory of complex systems, economic and financial models and econometric methods.
The FCO is built on the hypothesis that the underlying cause of a crash should be found in the preceding months and years, in the progressively increasing build-up of market cooperativity, or effective interactions between investors, often translated into accelerating ascent of the market price (the bubble). The objective of the FCO is to provide warnings at different time scales (week, month, quarter) on the development of future financial instabilities.
The FCO currently monitors the 500 largest US companies constituting the S&P500 index, and we plan to extend this analysis to the +6000 US companies quoted in the different US stock markets, as well as to the Japanese, European, Asian and other worldwide financial markets. In parallel, the FCO will monitor and analyze the major financial indices in the major countries. It is also projected to extend this analysis to commodities, currencies and bonds.
- QUOTE: 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. We focus on financial bubbles and crashes, as they constitute the most momentous and revealing financial events that have extraordinarily important impacts and consequences at all levels of the economic spectrum. Our research combines the theory of out-out-equilibrium physical systems, the theory of complex systems, economic and financial models and econometric methods.
2009
- (Sornette, 2009) ⇒ Didier Sornette. (2009). “Dragon-Kings, Black Swans and the Prediction of Crises." Swiss Finance Institute Research Paper 09-36.
- QUOTE: … It is important to stress that our methodology allows us to predict the end of bubbles, but not the crashes per se [33-35]. It is often the case that a bubble bursts into a crash but this is not always the case. The end of a bubble may be a plateau or a slow decay.
Of course, we are not able to predict stock markets with anything close to 100 percent accuracy - just as weather forecasting cannot say with absolute certainty what the weekend weather will be - but our predictions will become more accurate as we refine our methods, as presently undergoing with the new Financial Crisis Observatory [70]. The Financial Crisis Observatory 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.
Stock market crashes are often unforeseen by most people, especially economists. One reason why predicting complex systems is difficult is that we have to look at the forest rather than the trees, and almost nobody does that. Our approach tries to avoid that trap. From the tulip mania, where tulips worth tens of thousands of dollars in present U.S. dollars became worthless a few months later, to the U.S. bubble in 2000, the same patterns occur over the centuries. Today we have electronic commerce, but fear and greed remain the same. Humans remain endowed with basically the same qualities today as they were in the 17th century. …
- QUOTE: … It is important to stress that our methodology allows us to predict the end of bubbles, but not the crashes per se [33-35]. It is often the case that a bubble bursts into a crash but this is not always the case. The end of a bubble may be a plateau or a slow decay.