How the financial crash of October 1997 could have been predicted

N. Vandewalle; M. Ausloos; Ph. Boveroux; A. Minguet

doi:10.1007/s100510050361

EPJ

How the financial crash of October 1997 could have been predicted

N. Vandewalle¹^a, M. Ausloos¹, Ph. Boveroux² and A. Minguet²

¹ SUPRAS, Institut de Physique B5, Université de Liège, 4000 Liège, Belgium
² Théorie monétaire et finances B31, Faculté d'Économie, Gestion et Sciences Sociales, Université de Liège, 4000 Liège, Belgium

Received: 23 March 1998
Accepted: 23 April 1998
Published online: 15 July 1998

Abstract

From the analysis of (closing value) stock market index like the Dow Jones Industrial average and the S& P500 it is possible to observe the precursor of a so-called crash. This is shown on the Oct. 1987 and Oct. 1997 cases. The data analysis indicates that the index divergence has followed twice a "universal" behavior, i.e. a logarithmic dependence, superposed on a well defined oscillation pattern. The prediction of the crash date is remarkable and can be done two months in advance. In the spirit of phase transition phenomena, the economic index is said to be analogous to a signal signature found in a two dimensional fluid of vortices.

PACS: 01.75.+m – Science and society / 89.90.+n – Other areas of general interest to physicists