Quantitative Modeling of Speculative Bubbles, Crash Dynamics, and Critical Transitions in the Stock Market Using the Log-Periodic Power-Law Model
Year: 2025
Type: article
Abstract: The global economy frequently experiences cycles of rapid growth followed by abrupt crashes, challenging economists and analysts in forecasting and risk management. Crashes like the dot-com bubble crash and the 2008 global financial crisis caused huge disruptions to the world economy. These crashes have been found to display somewhat similar characteristics, like rapid price inflation and speculation, followed by collapse. In search of these underlying patterns, the Log-Periodic Power-Law (LPPL) model has emerged as a promising framework, capable of capturing self-reinforcing dynamics and log-periodic oscillations. However, while log-periodic structures have been tested in developed and stable markets, they lack validation in volatile and developing markets. This study investigates the applicability of the LPPL framework for modeling financial crashes in the Brazilian stock market, which serves as a representative case of a volatile market, particularly through the Bovespa Index (IBOVESPA). In this study, daily data spanning 1993 to 2025 is analyzed to model pre-crash oscillations and speculative bubbles for five major market crashes. In addition to the traditional LPPL model, autoregressive residual analysis is incorporated to account for market noise and improve predictive accuracy. The results demonstrate that the enhanced LPPL model effectively captures pre-crash oscillations and critical transitions, with low error metrics. Eigenstructure analysis of the Hessian matrices highlights stiff and sloppy parameters, emphasizing the pivotal role of critical time and frequency parameters. Overall, these findings validate LPPL-based nonlinear modeling as an effective approach for anticipating speculative bubbles and crash dynamics in complex financial systems.
DOI: 10.3390/ijfs13040195
Authors: Avi Singh, Rajesh Mahadeva, Varun Sarda, Amit Kumar Goyal
Institution: Manipal Academy of Higher Education
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $2,172
OpenAlex ID: W4415301866