Stock market crashes, Precursors and Replicas

TL;DR

This paper analyzes the behavior of the S&P 500 around the 1987 crash, identifying precursors and aftershock patterns that suggest the market behaves like a self-organizing critical system with log-periodic signatures.

Contribution

It introduces the concept of stock market crashes as dynamical critical points with characteristic oscillations, supported by analysis of multiple crashes and analogy to earthquake phenomena.

Findings

Identification of precursory patterns before crashes

Detection of aftershock signatures post-crash

Evidence of log-periodic oscillations indicating criticality

Abstract

We present an analysis of the time behavior of the $S\&P500$ (Standard and Poors) New York stock exchange index before and after the October 1987 market crash and identify precursory patterns as well as aftershock signatures and characteristic oscillations of relaxation. Combined, they all suggest a picture of a kind of dynamical critical point, with characteristic log-periodic signatures, similar to what has been found recently for earthquakes. These observations are confirmed on other smaller crashes, and strengthen the view of the stockmarket as an example of a self-organizing cooperative system.