Wouldn’t it be great to determine a bubble as it was happening? That’s an objectively impossible task, though it hasn’t stopped people from trying to come up with a mathematical framework. An asset going up doesn’t necessarily make a bubble, because sometimes there’s a fundamental reason for that asset going up. Strategists at JPMorgan highlighted a model created in 2000, which fits the price time series of an asset to a logarithmic power law equation.
“The bubble is one in which the fitted parameters point to a faster-than-exponential growth, an increasing number of oscillations (more volatility at the end of the bubble), and a critical time in which growth rate becomes infinite,” the JPMorgan team said. That sounds great, but for one thing: “We can conclude that the bubble/anti-bubble signals by themselves do not seem to work,” the bank’s quants said. (We’ll spare you the details.) But the JPMorgan team did some tinkering, adding to this model a moving average, to determine when mean reversion has started. In this way, investors using the framework would not be fighting the market or committing too early. “While the emergence of bubble probabilities should make us more progressively nerv …
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