Financial bubble theory and the log periodic power law application to Malaysian stock market

Devendran Indiran, Munira Ismail, Zaidi Isa

Research output: Contribution to journalArticle

Abstract

Financial bubbles crashes phenomena has puzzled the economists for decades. The Efficient Market Hypotheses states that the stock market is efficient and all stock prices reflect all information. However, despite the efficient market hypothesis, financial bubbles which lead to financial crashes still persist in the market. This paper attempts to deviate from the efficient market hypothesis, and aimed to explore the causes of financial bubbles. Financial bubbles can be formed as a result of irrational euphoria, heterogeneous beliefs, positive feedback trading, synchronization failure among the traders, level of testosterone of traders and many other factors. Next, we discuss on the methods that has been developed to capture the bubbles and predict the financial crashes. There are numerous evidences that have shown that LPPL model is able to predict the financial crashes. Modifications have been made to this model to increase its efficiency in predicting financial crashes. We will additionally discuss on the implications of the Log Periodic Power Law model and also the changed versions in predicting financial crashes.

Original languageEnglish
Pages (from-to)357-362
Number of pages6
JournalInternational Journal of Innovative Technology and Exploring Engineering
Volume8
Issue number4S
Publication statusPublished - 1 Jan 2019

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Keywords

  • Financial bubbles
  • Financial crashes
  • Log-periodic power law

ASJC Scopus subject areas

  • Electrical and Electronic Engineering
  • Civil and Structural Engineering
  • Mechanics of Materials
  • Computer Science(all)

Cite this

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abstract = "Financial bubbles crashes phenomena has puzzled the economists for decades. The Efficient Market Hypotheses states that the stock market is efficient and all stock prices reflect all information. However, despite the efficient market hypothesis, financial bubbles which lead to financial crashes still persist in the market. This paper attempts to deviate from the efficient market hypothesis, and aimed to explore the causes of financial bubbles. Financial bubbles can be formed as a result of irrational euphoria, heterogeneous beliefs, positive feedback trading, synchronization failure among the traders, level of testosterone of traders and many other factors. Next, we discuss on the methods that has been developed to capture the bubbles and predict the financial crashes. There are numerous evidences that have shown that LPPL model is able to predict the financial crashes. Modifications have been made to this model to increase its efficiency in predicting financial crashes. We will additionally discuss on the implications of the Log Periodic Power Law model and also the changed versions in predicting financial crashes.",
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