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Why Stock Markets CrashCritical Events in Complex Financial Systems$
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Didier Sornette

Print publication date: 2017

Print ISBN-13: 9780691175959

Published to Princeton Scholarship Online: May 2018

DOI: 10.23943/princeton/9780691175959.001.0001

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Financial Crashes: What, How, Why, and When?

Financial Crashes: What, How, Why, and When?

(p.3) Chapter 1 Financial Crashes: What, How, Why, and When?
Why Stock Markets Crash

Didier Sornette

Princeton University Press

This chapter explains what financial crashes are and why, how, and when they occur. More specifically, it examines the mechanisms underlying crashes; whether we can forecast crashes; whether we could control or at least have some influence on crashes; whether crashes indicate a fundamental instability in the world financial structure; and what could be changed to modify or suppress these instabilities. The chapter considers the stock market crash of October 1987 and the main explanations for its occurrence, as well as other financial crashes in history, including the tulip mania, the South Sea bubble, and the great crash of October 1929. It also discusses extreme events in complex systems and concludes with an analysis of a new set of computational methods that can be used in the prediction of large-scale financial crashes.

Keywords:   financial crashes, stock market crash, tulip mania, South Sea bubble, extreme events, complex systems, computational methods, prediction

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