Search results

This study aims to predict stock market crashes identified by the CMAX approach (current index level relative to historical maximum) during periods of global and local events, namely the subprime crisis of 2008, the political and social instability of 2011 and the COVID-19 pandemic.

Over the period 2004–2020, a log-periodic power law model (LPPL) has been employed which describes the price dynamics preceding the beginning dates of the crisis. In order to adjust the LPPL model, the Global Search algorithm was developed using the “fmincon” function.

By minimizing the sum of square errors between the observed logarithmic indices and the LPPL predicted values, the authors find that the estimated parameters satisfy all the constraints imposed in the literature. Moreover, the adjustment line of the LPPL models to the logarithms of the indices closely corresponds to the observed trend of the logarithms of the indices, which was overall bullish before the crashes. The most predicted dates correspond to the start dates of the stock market crashes identified by the CMAX approach. Therefore, the forecasted stock market crashes are the results of the bursting of speculative bubbles and, consequently, of the price deviation from their fundamental values.

The adoption of the LPPL model might be very beneficial for financial market participants in reducing their financial crash risk exposure and managing their equity portfolio risk.

This study differs from previous research in several ways. First of all, to the best of the authors' knowledge, the authors' paper is among the first to show stock market crises detection and prediction, specifically in African countries, since they generate recessionary economic and social dynamics on a large extent and on multiple regional and global scales. Second, in this manuscript, the authors employ the LPPL model, which can expect the most probable day of the beginning of the crash by analyzing excessive stock price volatility.