Thursday, October 23, 2008
More Crash Thoughts
Today Alan Greenspan spoke to the US Congress about the current stock crash. He called it the storm-of-the-century, and predicted it would last for decades. But as we have no recorded data on storms-of-the-century, what is the basis of his prediction ??? We hope it is not a complex dynamical model !!! The teachings of our five-year research on financial bubbles and crashes using agent-based modeling suggest that this crash is largely psychological, involving the effect of investors' memories of prior losses, which is longer lasting that their memories of prior gains. These memories both decay in time, and this is the basis of my expectation that the stock markets will recover within six months --- all depending, of course, on the outcome of the November 4th election.
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5 comments:
Assymetric knowledge of information ?
Zillion$ derivative market bubble waiting to explode, geopolitic events, death of the $ (fiat currencies), end of America as we know it ?
Ralph, I estimated your model using data and based on the magnitude or how large c2 gets gives one some indication of how long the it will take the crash to bottom out, meaning how long it will take to start an uptrend. According to the data it will take at least 18 months. That is 18 starting from July 2008.
Could something be done by i.e. the FED, or the government to end it earlier?
Which measures do you think would be the most effective ones?
In real rather than nominal terms, the Dow is now at mid 1995 levels. To illustrate, suppose you put $1000 into an an index fund tracking the Dow in 01/1990. In real terms--controlling for inflation--this would now be worth roughly $1450, representing a return of approximately 2% per year, which represents modest capital appreciation. If we were looking for a trough, we would seem to be in the range. The bubble-and crash model, however, (referred to in this blog) shows a tendency for actors to overshoot. In this regard, we can reasonably expect the Dow to reach the 4000s before the end of this so-called "great recession."
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