Financial Bubble Theory and the Log Periodic Power Law Application to Malaysian Stock Market
Devendran Indiran1, Munira Ismail2, Zaidi Isa3
1Devendran Indiran, School of Mathematical Sciences, University Kebangsaan Malaysia, Pekan Bangi, Bangi, Selangor, Malaysia.
2Munira Ismail, School of Mathematical Sciences, University Kebangsaan Malaysia, Pekan Bangi, Bangi, Selangor, Malaysia.
3Zaidi Isa, School of Mathematical Sciences, University Kebangsaan Malaysia, Pekan Bangi, Bangi, Selangor, Malaysia.
Manuscript received on 05 February 2019 | Revised Manuscript received on 12 February 2019 | Manuscript Published on 13 February 2019 | PP: 357-362 | Volume-8 Issue- 4S February 2019 | Retrieval Number: DS2889028419/2019©BEIESP
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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..
Keywords: Financial Bubbles, Financial Crashes, Log-Periodic Power Law.
Scope of the Article: Cryptography and Applied Mathematics