Empirical symptoms of catastrophic bifurcation transitions on financial markets: A phenomenological approach

TL;DR

This paper provides empirical evidence of catastrophic bifurcation transitions in financial markets, identifying early-warning signals like flickering phenomena and critical slowing down during market crashes.

Contribution

It introduces metrics for detecting catastrophic bifurcations in financial markets and demonstrates their presence during the 2008 financial crisis across various market capitalizations.

Findings

Presence of flickering phenomena before market crashes

Detection of critical slowing down as an early-warning signal

Empirical validation on multiple market types

Abstract

The principal aim of this work is the evidence on empirical way that catastrophic bifurcation breakdowns or transitions, proceeded by flickering phenomenon, are present on notoriously significant and unpredictable financial markets. Overall, in this work we developed various metrics associated with catastrophic bifurcation transitions, in particular, the catastrophic slowing down (analogous to the critical slowing down). All these things were considered on a well-defined example of financial markets of small and middle to large capitalization. The catastrophic bifurcation transition seems to be connected with the question of whether the early-warning signals are present in financial markets. This question continues to fascinate both the research community and the general public. Interestingly, such early-warning signals have recently been identified and explained to be a consequence of a catastrophic bifurcation transition phenomenon observed in multiple physical systems, e.g. in ecosystems, climate dynamics and in medicine (epileptic seizure and asthma attack). In the present work we provide an analogical, positive identification of such phenomenon by examining its several different indicators in the context of a well-defined daily bubble; this bubble was induced by the recent worldwide financial crisis on typical financial markets of small and middle to large capitalization.