Econophysicists Develop and Test "Bubble Index"

eldavojohn writes "Oh if only we could identify the bubble markets as they appear, but with all the random variables, it would take some sort of econophysicist to build predictions for that! Well, a team has released a definition of a 'bubble index' that led them to make predictions of bubbles six months ago that would pop between then and now. The four bubbles they selected were the IBOVESPA Index of 50 Brazilian stocks, a Merrill Lynch Corporate Bond Index, the spot price of gold, and cotton futures. Two out of the four were bubbles, with Merrill Lynch being a bubble already popping and cotton continuing to soar into even bubblier status. Still, for your first try, 50% isn't bad. The team learned a lot of new things from the first run, revised their method, selected their predictions for the next six months, and sealed them. Only time will tell if they are truly onto predicting crashes."

Comments

Re:Self-fulfilling prophecies

[doppe1]

But they don't want the bubble to happen, that's the point. By being able to predict that bubbles are happening, the markets can sell off sooner, rather than allowing the bubble to continue growing, and thus once the sell-off happens, it is not such a dramatic down-shift, since the prices were not allowed to rise to artificial highs.

Re:Self-fulfilling prophecies

[dkleinsc]

Except that they won't, for two reasons:
1. Investors are (collectively at least) really stupid. This has been proven time and again.
2. They think "this time, it's different. We know how to prevent this from becoming a bubble."

For instance, there were smart economists saying back in 2006 or so "watch out, there's a housing bubble". And what most of Wall St did was say "shut up, I'm busy counting my winnings".

fifty percent is *NOT* bad

[ClickOnThis]

I'd rather predict 0%. That way I could reverse the predictions and get100%. 50% means a flip of a coin would work.

It depends on what you're predicting 50% of. If you predict 50% of the winners of a horse race, then half the time you're choosing the right horse. You could probably make a living at the track. On the other hand, if you predict 0% of the winners, you'll go broke betting on the other 9 horses all the time.

Now, instead of 10 horses, imagine hundreds of companies traded on the stock market...

Re:Self-fulfilling prophecies

[PPH]

The trouble then becomes selecting a group that we can trust with the wealth of nations, and the power to destroy by proclamation.

We could call it the Federal Reserve.