https://doi.org/10.1140/epjb/e2013-40587-y
Regular Article
Bubbles, shocks and elementary technical trading strategies
The University of Sheffield, Management School,
Conduit Road, Sheffield S10 1
FL, UK
a e-mail: frymaths@googlemail.com
Received:
18
June
2013
Received in final form:
20
September
2013
Published online:
7
January
2014
In this paper we provide a unifying framework for a set of seemingly disparate models for bubbles, shocks and elementary technical trading strategies in financial markets. Markets operate by balancing intrinsic levels of risk and return. This seemingly simple observation is commonly over-looked by academics and practitioners alike. Our model shares its origins in statistical physics with others. However, under our approach, changes in market regime can be explicitly shown to represent a phase transition from random to deterministic behaviour in prices. This structure leads to an improved physical and econometric model. We develop models for bubbles, shocks and elementary technical trading strategies. The list of empirical applications is both interesting and topical and includes real-estate bubbles and the on-going Eurozone crisis. We close by comparing the results of our model with purely qualitative findings from the finance literature.
Key words: Statistical and Nonlinear Physics
© EDP Sciences, Società Italiana di Fisica and Springer-Verlag, 2014