QuoteOriginally posted by: Traden4AlphaWouldn't a wide spread belief that no crash will occur be a prerequisite for a crash? And if enough people (especially those controlling the money faucet) believe a crash will happen, then the steps they take will mitigate it.Risk is highest when people think their is no risk.I doubt that. Even if you know a bubble is forming, it might still be rational to ride it. "Greater fool theory" and all.

QuoteOriginally posted by: soresQuoteOriginally posted by: Traden4AlphaWouldn't a wide spread belief that no crash will occur be a prerequisite for a crash? And if enough people (especially those controlling the money faucet) believe a crash will happen, then the steps they take will mitigate it.Risk is highest when people think their is no risk.I doubt that. Even if you know a bubble is forming, it might still be rational to ride it. "Greater fool theory" and all.IMO this theory is more widespread than we think. It is very risky. I suppose your timing must be spot on when jumping ship just before the party's over? I think the property market in the last decade is a great example.QuoteRisk is highest when people think their is no risk.When people are in denial, they are riding the crest of a wave until it hits land.

QuoteOriginally posted by: CuchulainnQuoteOriginally posted by: soresQuoteOriginally posted by: Traden4AlphaWouldn't a wide spread belief that no crash will occur be a prerequisite for a crash? And if enough people (especially those controlling the money faucet) believe a crash will happen, then the steps they take will mitigate it.Risk is highest when people think their is no risk.I doubt that. Even if you know a bubble is forming, it might still be rational to ride it. "Greater fool theory" and all.IMO this theory is more widespread than we think. It is very risky. I suppose your timing must be spot on when jumping ship just before the party's over? I think the property market in the last decade is a great example.Exactly! Those who think they understand the greater fool theory think they can jump out of the market at the top. But this misunderstand two key problems with this strategy: 1) the top is only visible in hindsight; 2) "getting out" requires liquidity and that's what disappears. That second issue has only gotten worse with the rise of HFT (and other kinds of high-twitchy systems) -- more and more of the order book and market signals contain false indications of liquidity that vanish as soon as someone tries to tap that liquidity. The bid is there until you try to lift it. The bank claims to be eager to lend you money until you try to borrow it.

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: soresQuoteOriginally posted by: Traden4AlphaWouldn't a wide spread belief that no crash will occur be a prerequisite for a crash? And if enough people (especially those controlling the money faucet) believe a crash will happen, then the steps they take will mitigate it.Risk is highest when people think their is no risk.I doubt that. Even if you know a bubble is forming, it might still be rational to ride it. "Greater fool theory" and all.IMO this theory is more widespread than we think. It is very risky. I suppose your timing must be spot on when jumping ship just before the party's over? I think the property market in the last decade is a great example.Exactly! Those who think they understand the greater fool theory think they can jump out of the market at the top. But this misunderstand two key problems with this strategy: 1) the top is only visible in hindsight; 2) "getting out" requires liquidity and that's what disappears. That second issue has only gotten worse with the rise of HFT (and other kinds of high-twitchy systems) -- more and more of the order book and market signals contain false indications of liquidity that vanish as soon as someone tries to tap that liquidity. The bid is there until you try to lift it. The bank claims to be eager to lend you money until you try to borrow it.1) Not necessarily. You just need to sell at a profit and jump ship. Who cares if it's the top?2) Sell at the right moment; your product is liquid. No problem yet? Do you see a problem in a booming market? Tulip Mania.

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: CuchulainnQuoteWouldn't a wide spread belief that no crash will occur be a prerequisite for a crash? Probably. What do you think yourself?Generally I would say "yes" but my answer might be nuanced by the definition of "wide spread" which is less about popular opinion and more about the beliefs of those who buy and sell the assets that become over-valued and crash (or influence that activity such as through regulation or the supply of capital). As long as enough bulls believe in the boom (and too few bears believe in the crash), the asset will remain overpriced in the eyes of some but fair-valued in the eyes of those that set the price.QuoteOriginally posted by: CuchulainnQuoteAnd if enough people (especially those controlling the money faucet) believe a crash will happen, then the steps they take will mitigate it.Has this ever happened in your opinion?Honestly, I don't know. Clearly, history has an infinity of counterfactuals in which "it could have been worse" and perhaps we can thank someone for that mitigation. It would take a careful study of all the bubbles that someone warned about but which did not pop.How frequent should crashes be? (That's assuming crashes can even be modeled in stochastic terms) And have crashes been more or less frequent than that?austrian economics teaches us that when the central bank believes a crash will happen and attempts to mitigate it, at best they just push the crash down the road by prolonging the bubble It happened after 9/11, the Fed stepped in then, and the eventual meltdown was at the end of the decade

QuoteOriginally posted by: CuchulainnQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: soresQuoteOriginally posted by: Traden4AlphaWouldn't a wide spread belief that no crash will occur be a prerequisite for a crash? And if enough people (especially those controlling the money faucet) believe a crash will happen, then the steps they take will mitigate it.Risk is highest when people think their is no risk.I doubt that. Even if you know a bubble is forming, it might still be rational to ride it. "Greater fool theory" and all.IMO this theory is more widespread than we think. It is very risky. I suppose your timing must be spot on when jumping ship just before the party's over? I think the property market in the last decade is a great example.Exactly! Those who think they understand the greater fool theory think they can jump out of the market at the top. But this misunderstand two key problems with this strategy: 1) the top is only visible in hindsight; 2) "getting out" requires liquidity and that's what disappears. That second issue has only gotten worse with the rise of HFT (and other kinds of high-twitchy systems) -- more and more of the order book and market signals contain false indications of liquidity that vanish as soon as someone tries to tap that liquidity. The bid is there until you try to lift it. The bank claims to be eager to lend you money until you try to borrow it.1) Not necessarily. You just need to sell at a profit and jump ship. Who cares if it's the top?2) Sell at the right moment; your product is liquid. No problem yet? Do you see a problem in a booming market? Tulip Mania.Sores suggested it was rational to ride the bubble. If one does not already own the bubble asset, then when does one buy and when does one sell? At some level, it's the speculators that define the pool of greater fools. "Jumping ship" raises the issue of where does one go? That question has two sub issues. First, the investor/speculator may see no other sector as having as high a yield as the bubble sector. And, second, in a big bubble, the entire economy might be wrapped up in it. In the US, at least, the real estate bubble drove spending and expansion in everything else: cars, retail, service, etc.Selling at the right moment! Aye, there's the rub! Today the asset is liquid, the price is still rising quickly, and everyone is garnering paper profits = "Don't sell yet" But what will tomorrow bring? The speculator needs to estimate the second derivative of the price trajectory which is extremely noisy and only computable for the past.

"The speculator needs to estimate the second derivative of the price trajectory which is extremely noisy and only computable for the past. "Of course, if we were to take our models seriously price paths are not differentiable, let alone twice!

QuoteOriginally posted by: bearishOf course, if we were to take our models seriously price paths are not differentiable, let alone twice!Can you not use cubic spline to smooth the data?

QuoteOriginally posted by: CuchulainnQuoteOriginally posted by: bearishOf course, if we were to take our models seriously price paths are not differentiable, let alone twice!Can you not use cubic spline to smooth the data?Splines assume the price data are perfect. If empirical prices are perturbed by epsilon, then some sort of best-fit/minimized-error curve fit seems the proper approach. Of course if epsilon is extremely large and strongly autocorrelated until it reverts violently (bubble!), then what?

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: bearishOf course, if we were to take our models seriously price paths are not differentiable, let alone twice!Can you not use cubic spline to smooth the data?Splines assume the price data are perfect. If empirical prices are perturbed by epsilon, then some sort of best-fit/minimized-error curve fit seems the proper approach. Of course if epsilon is extremely large and strongly autocorrelated until it reverts violently (bubble!), then what?I agree. I was being half serious.Splines don't work so well with spars data.

QuoteSelling at the right moment! Aye, there's the rub! Today the asset is liquid, the price is still rising quickly, and everyone is garnering paper profits = "Don't sell yet" But what will tomorrow bring? The speculator needs to estimate the second derivative of the price trajectory which is extremely noisy and only computable for the past. Or to realize 'everything that goes up must come down', usually discontinuously. Second order derivatives are contingent on a smooth landing.??It did not take long for the tulip traders in Amsterdam to realize that the price was rapidly dropping in the Haarlem coffee houses.

QuoteOriginally posted by: CuchulainnQuoteSelling at the right moment! Aye, there's the rub! Today the asset is liquid, the price is still rising quickly, and everyone is garnering paper profits = "Don't sell yet" But what will tomorrow bring? The speculator needs to estimate the second derivative of the price trajectory which is extremely noisy and only computable for the past. Or to realize 'everything that goes up must come down', usually discontinuously. Second order derivatives are contingent on a smooth landing.??It did not take long for the tulip traders in Amsterdam to realize that the price was rapidly dropping in the Haarlem coffee houses.The sticky part of speculators is that the begining of any price drop looks just like a minor correction before prices continue to march upward. It looks like a great buying opportunty!Do all "up" things come down? The Dow, GDP, wages, etc. are all markedly higher today than in 1965, 1915, 1865, 1815, 1765, 1715, etc.

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: CuchulainnQuoteSelling at the right moment! Aye, there's the rub! Today the asset is liquid, the price is still rising quickly, and everyone is garnering paper profits = "Don't sell yet" But what will tomorrow bring? The speculator needs to estimate the second derivative of the price trajectory which is extremely noisy and only computable for the past. Or to realize 'everything that goes up must come down', usually discontinuously. Second order derivatives are contingent on a smooth landing.??It did not take long for the tulip traders in Amsterdam to realize that the price was rapidly dropping in the Haarlem coffee houses.1. The sticky part of speculators is that the begining of any price drop looks just like a minor correction before prices continue to march upward. It looks like a great buying opportunty!2. Do all "up" things come down? The Dow, GDP, wages, etc. are all markedly higher today than in 1965, 1915, 1865, 1815, 1765, 1715, etc.1. Especially with the layman?2. But not in our lifetime, Jim.

QuoteOriginally posted by: CuchulainnQuoteOriginally posted by: acastaldo....What I don't get is 2006: almost no one was predicting a crash with the exception of a few individuals and certainly not the IMF AFAIR.What I don't get is why we haven't had another serious crash since '08. There has been so much good-money-after bad pumped into the economy and one glance at CNX, SSE etc shows where it's gone. All the gloom-mongers in 2008 who wanted to retire to the country with supplies of tinned food and guns were essentially correct. The argument must be even stronger now but so are the forces of denial.I am a big fan of Sornette's ides of log-periodicity and finite time singularities. Didn't his book predict the ultimate singularity (log frequency [$]\rightarrow\infty[$]) where financial markets completely breakdown, to be around 2030... ?Sounds about right.