NASDAQ Remains in Mean Regressive State

The Bifurcation Parameter for the NASDAQ Composite Index slipped back to -22% over the past few weeks (white arrow on the chart). Figure 1 summarizes the average daily return expected from each of the four key market states expected from the Bifurcation Parameter (and prior day return, R(0)).

NASDAQ Composite Index Returns for States Predicted by the NASDAQ Bifurcation Parameter (click on chart to enlarge)

The statistical significance of each state is based on a comparison with the efficient state (when -10% < BP < +10%). The statistical significance of the Crisis Market State is questionable at p = 0.1 which is below the 95% confidence level benchmark and approximately the same as found for the Dow Industrial as briefed in Zurich and shown on the briefing slides for that talk. In contrast, the Bull and Bear states are both highly statistically significant. For the Zurich talk, daily returns were annualized and the t-test was based on comparing each state with the buy and hold benchmark (as opposed to the efficient market state).

Over Reaction, Disordered Market Continues

We introduce an Efficient Market state, defined as -10% < Bifurcation Parameter < +10%. This represents a market where there isn't much over reaction or under reaction to news. We also update prior coherent and chaotic market state definitions, requiring the Bifurcation Parameter to be >= +10%. Therefore the Coherent and Chaotic markets clearly represent under reaction situations and trend persistent states. We also use the prior day return, R(t) to differentiate between coherent (R(t)>=0) and chaotic (R(t)<0) states. These definitions and associated risk and returns since July 1929 are summmarized as follows:

Coherent Bull Markets
Bifurcation Parameter >= +10%
R(t) >= 0 (prior day return is positive)
RETURN 37.94%
RISK 15.05%
% TIME 24.16%

Efficient Markets
-10% < Bifurcation Parameter < +10%
RETURN 6.16%
RISK 14.85%
% TIME 45.25%

Chaotic Markets
Bifurcation Parameter > +10%
R(t) < 0 (prior day return is negative)
RETURN -13.50%
RISK 17.87%
% TIME 22.15%

Disordered Markets
Bifurcation Parameter < -10%
RETURN -17.17%
RISK 36.65%
% TIME 8.43%

International Workshop on Coping with Crises in Complex Socio-Economic Systems

ETH Zurich (Switzerland), June 8-12, 2009
Monday, June 8, 2009:
15:20 - 15:45 CAB G 51
Tonis Vaga: A Financial Market Bifurcation Parameter

Preliminary Program

Poster Presentations

Organizers

Kay Axhausen
Lars-Erik Cederman
Dirk Helbing (Coordinator)
Hans Jürgen Herrmann
Frank Schweitzer
Didier Sornette

Social systems typically feature crises, i.e. unstable and dangerous situations that are characterized by abrupt and large-scale changes. Such disruptions are very hard to predict with any precision and even harder to control. Indeed, crises often convey an impression that key decision makers have lost control and that events unfold in an unstoppable and even catastrophic way. Examples include environmental crises, the collapse of transportation systems, as well as financial and social crises such as poverty, social conflicts or wars.

These and other issues will be addressed during the meeting, which combines elements of an interdisciplinary workshop with a think tank and a summer school for young scientists. Scientists and students interested in participating in this workshop are asked to send an e-mail to Lubos Buzna (lbuzna@ethz.ch) or Amin Mazloumian (amin@gess.ethz.ch) to be included in the e-mail distribution list of this workshop.

I look forward to meeting you!
Dirk Helbing, on behalf of the organizing committee.