Market Crashes as Critical Phenomena? Explanation, Idealization, and Universality in Econophysics

TL;DR

This paper analyzes the Johansen-Ledoit-Sornette model of financial crashes, framing it as a minimal yet causally explanatory model within the philosophy of science, highlighting its relevance to understanding market crashes as critical phenomena.

Contribution

It interprets the JLS model as a minimal causal explanation of market crashes, bridging econophysics and philosophy of science perspectives.

Findings

The JLS model functions as a minimal causal explanation.

It aligns with the interventionist account of causation.

The model offers insights into market crashes as critical phenomena.

Abstract

We study the Johansen-Ledoit-Sornette (JLS) model of financial market crashes (Johansen, Ledoit, and Sornette [2000] "Crashes as Critical Points." Int. J. Theor. Appl. Finan. 3(2) 219-255). On our view, the JLS model is a curious case from the perspective of the recent philosophy of science literature, as it is naturally construed as a "minimal model" in the sense of Batterman and Rice (Batterman and Rice [2014] "Minimal Model Explanations." Phil. Sci. 81(3): 349-376) that nonetheless provides a causal explanation of market crashes, in the sense of Woodward's interventionist account of causation (Woodward [2003]. Making Things Happen. Oxford:Oxford University Press).