A Mini Bubble in the SP500 ready to Burst?

8/14/2019 A Mini Bubble in the SP500 ready to Burst?

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A MINI BUBBLE IN THE SP500 READY TO BURST?

Talking with some friends of mine, we discussed the possibility that a possible (mini) bubble

is forming in the Emini-SP500 , starting from the beginning of February 2010.

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E-mini SP500: 04/01/2010 - 12/03/2010 (daily data)


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E-mini SP500: 08/02/2010 - 12/03/2010 (hourly data)


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Therefore I decided to use the famous Log Periodid Power Law by Johansen, Ledoit andSornette (2000) to model this possible bubble. I choose this model because it is one of the veryfew quantitative models which was able to predict the end (or slow deflation) of financialbubbles with a good degree of success, both ex-ante and ex-post:

where t < tc is any time before the bubble, A > 0 is the value of ln(p(tc)) at the critical time, B tN (where tN is

the last observation in the estimation sample) , B < 0 and 0 < b< 1


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(The time index ton the vertical axis is converted in units of one year, so that 1 day = 1/365=0.002739 of the year)

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Recursively Estimated Critical Time tc (hourly data)

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Recursively Estimated exp(A) p(tc) , (hourly data)

exp(A) 1st quartile (1127) 3rd quartile (1198) Median (1145)


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Summarizing: considering the 1st quartile / 3rd quartile, the estimated critical time tcranges (approximately) from March the 5th 2010, till March the 17th 2010, with amedian close to March the 11th 2010, (while the mean is close to March the 13th

2010).

As for the estimated value of the price at the critical time, that is p(tc) which isapproximately equal to exp(A), it ranges between 1127 and 1198, with a median of1145.

While many analysts highlighted that the equity markets are strongly overvalued, it israther dubious whether the Fed and the American Administration wouldappreciate a renewed market downturn (particularly before the mid-termelections).

Nevertheless, it is also true that the US (and all the rest of the planet) has to placeand roll over trillions of public debt in the next months, so a (maybe limited)market downturn could be beneficial in this regard.

Well, time will tell whether this approach was a good one in this occasion, or not. Asfor my myself I did it for curiosity and for fun, too.

DISCLAIMER: The content of this presentation is provided as general information only and should not be taken as investment advice. All content shall not be construed as a recommendation to buy or sell

any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed in this presentation are solely the opinions of the author and do not necessarily

represent the opinions of sponsors or firms or public/private institutions affiliated with the author. Any action that you take as a result of information, or analysis, contained in this presentation is

ultimately your responsibility.

A Mini Bubble in the SP500 ready to Burst?

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