Natural Phenomenon & Market Crashes

Abstract: In recent years a lot of criticism against the main assumptions of economic modeling has come to up, this has led to physicists entering the field of economics. By applying models originally developed for physics to economics, especially finance, analyzing methods with a different approach can be used. Inspired by earthquakes Didier Sornette created a model that analyze financial market crashes. With the theories of power law and log-periodicity he created a model to find the critical point prior to the crash and thereby predict when the market is supposed to crash. The main objective of this paper is to, with the help of Didier Sornette’s Crash Model, analyze the possibility to predict market crashes. By fitting this model to OMX Stockholm 30 I will analyze if the crash of the Subprime Mortgage Crisis in 2007 could have been predicted. After fitting the model to the data set I found that the majority of the crash times were close to the real critical point. This leads to the conclusion that the model gives accurate result. To have in mind is that times close to the critical point is used as input variables in the fitting procedure and thereby could have given misleading result. This could be an area for future research in order to increase the reliability in the model.