Naslov
Does bargaining dynamics inherently cause market bubbles and crashes?

Autori
Kostanjčar, Zvonko ; Begušić, Stjepan ; Stanley, H. Eugene ; Podobnik, Boris

Vrsta, podvrsta i kategorija rada
Sažeci sa skupova, sažetak, znanstveni

Izvornik
7th General Advanced Mathematical Methods in Finance and Swissquote Conference / - Lausanne, 2015

Skup
7th General Advanced Mathematical Methods in Finance and Swissquote Conference

Mjesto i datum
Lausanne, Švicarska, 07.09.2015. - 10.09.2015

Vrsta sudjelovanja
Poster

Vrsta recenzije
Međunarodna recenzija

Ključne riječi
Cooperative game theory ; Feedback ; Market crash

Sažetak
Estimating a current stock price requires estimating future cash flows and cost of capitals. The accuracy of estimates can then be checked against the actual data, which emerge with the passage of time. Bad predictions are time-limited and in case of overestimation can induce abrupt adjustments in the form of market crashes. The question is: Can we predict the time of market crashes? Here, we propose a bargaining model based on a complex networks, where agents on the supply side of the market cooperate with agents on the demand side of the market, but agents who are on the same side of the market compete with each other. We demonstrate that the competition clustering in the networks directly affects the bargaining outcome, where bargaining dynamics strongly influence the emergence of market bubbles and the occurrence of market crashes. We propose a dynamical free cash flow model to estimate the intrinsic (fundamental) value of a financial index. When a bargaining process pushes market values to levels that are above intrinsic values, the uncertainty in market dynamics increases, and this increase in uncertainty could be used as an early warning indicator for market crashes. We illustrate the applicability and forecasting power of the network model for the S&P500 index by estimating a probability of market crash occurrence in period from April 2015 to December 2016. We demonstrate how our market crash predictions are in good agreement with the S&P500 index market crashes in the past.

Izvorni jezik
Engleski

Znanstvena područja
Matematika, Fizika, Računarstvo

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