UCLA - Earth and Space Sciences - Didier Sornette, Publications: Finance

Didier Sornette, Professor of Geophysics

Mailing Address:	Department of Earth and Space Sciences University of California, Los Angeles 595 Charles Young Drive East, Box 951567 Los Angeles, CA 90095-1567
Office:	Geology 1693A
Telephone:	(310) 825-2863
Fax:	(310) 206-3051
E-mail:	sornette@moho.ess.ucla.edu
Related Site:	UCLA Seismology Lab




Teaching	- Earthquakes (ESS 8)

Quick Links:	- Current Research Interests - Education - Researchers, Post-docs & Students

Publications:	- Complex Systems - Discrete Scale Invariance & Complex Exponents - Earthquakes & Ruptures - Finance

Books:	- Mechanisms of Scale Invariance and Beyond - Critical Phenomena in Natural Sciences (Textbook) - Why Stock Markets Crash? -- US edition -- Japanese translation - Extreme Financial Risks (Textbook) (From Dependence to Risk Management)

Predictions:	- The future of the USA stock market - Is There a Real-Estate Bubble in the US? (released 3rd June 2005) - The future of the UK and US real estate market (released March 2003) - A complex system view of why stock markets crash - Scientific Prediction of Catastrophes: A New Approach - The end of the growth era (PDF File) or click here for the technical article

Interviews:	- UCLA Press release (Dec. 1, 2004): Physicist Applies Physics to Best-Selling Books - Interview with Physics World, July Issue (2003), pp. 8-9. - Transcription of the interview with FS Newshour, California - Feb. 2003 (Transcription of the Interview) - UCLA Press release (Dec. 14, 2002): Stock Market Crashes Are Predictable

Essays:	- Celebrating the Physics of Geophysics, EOS 86 (46), 461,467 (2005) - On Universality - Endogenous versus Exogenous Origins of Crises - Sandpile models (PDF) entry in the in Encyclopedia of Nonlinear Science, Alwyn Scott, editor (Routledge, An Imprint of Taylor & Francis Group, New York, London, 2004). http://www.routledge-ny.com/ref/nonlinearsci/

Publications: Finance

W.-X. Zhou and D. Sornette, Non-parametric Determination of Real-Time Lag Structure between Two Time Series: the "Optimal Thermal Causal Path" Method with Applications to Economic Data, Journal of Macroeconomics, 28, 195-224 (2006)

Y. Malevergne, V.F. Pisarenko and D. Sornette, On the Power of Generalized Pareto Distribution (GPD) Estimators for Empirical Distributions of Log-Returns, Applied Financial Economics 16, 271-289 (2006)

R. Crane, J. Escobar and D. Sornette, The Donation-Payment Gift Card Concept: how to give twice with one card, submitted to the The Economists' Voice, The Berkeley Electronic Press (http://arxiv.org/abs/physics/0510068)

Y. Malevergne and D. Sornette, Higher-Moment Portfolio Theory (Capitalizing on Behavioral Anomalies of Stock Markets), Journal of Portfolio Management 31 (4), 49-55 (2005)

W.-X. Zhou and D. Sornette, Is There a Real-Estate Bubble in the US? Physica A 361, 297-308 (2006) (http://arxiv.org/abs/physics/0506027) Covered by PhysicsWeb at http://physicsweb.org/articles/news/9/6/4/1.

W.-X. Zhou and D. Sornette, Self-fulfilling Ising Model of Financial Markets, Physical Review Letters (http://arxiv.org/abs/physics/0503230)

Didier Sornette and Wei-Xing Zhou, Importance of Positive Feedbacks and Over-confidence in a Self-Fulfilling Ising Model of Financial Markets, submitted to Journal of Economic Behavior and Organization (http://arxiv.org/abs/cond-mat/0503607)

Y. Malevergne and D. Sornette, High-Order Moments and Cumulants of Multivariate Weibull Asset Returns Distributions: Analytical Theory and Empirical Tests: II, Finance Letters 3 (1), 54-63 (2004) (http://ssrn.com/abstract=714185)

Y. Malevergne and D. Sornette, Multivariate Weibull Distributions for Asset Returns: I, Finance Letters 2 (6), 16-32 (2004) (http://ssrn.com/abstract=714161)

J.V. Andersen and D. Sornette, A Mechanism for Pockets of Predictability in Complex Adaptive Systems, Europhysics Lett. (http://arXiv.org/abs/cond-mat/0410762)

D. Sornette and W.-X. Zhou, Non-parametric Determination of Real-Time Lag Structure between Two Time Series: the "Optimal Thermal Causal Path" Method, Quantitative Finance 5 (6), 577-591 (2005)
(http://arXiv.org/abs/cond-mat/0408166)

G. Broekstra, D. Sornette and W.-X. Zhou, Bubble, Critical Zone and the Crash of Royal Ahold, Physica A 346, 529-560 (2005). (http://arXiv.org/abs/cond-mat/0403563) and (http://papers.ssrn.com/paper.taf?abstract_id=520603)

V.F. Pisarenko and D.Sornette, New statistic for financial return distributions: power-law or exponential? Physica A (http://arXiv.org/abs/physics/0403075)

D. Sornette, Why stock markets crash? New Thesis 01 (1) 5-18 (2004) (http://www.newthesis.org/200401/01-200401.pdf)

B.M. Roehner, D. Sornette and J.V. Andersen, Response Functions to Critical Shocks in Social Sciences: An Empirical and Numerical Study, Int. J. Mod. Phys. C 15 (6), 809-834 (2004)(http://arXiv.org/abs/cond-mat/0402408)

W.-X. Zhou and D. Sornette, Causal Slaving of the U.S. Treasury Bond Yield Antibubble by the Stock Market Antibubble of August 2000, Physica A 337, 586-608 (2004) (http://arXiv.org/abs/cond-mat/0312658)

W.-X. Zhou and D. Sornette, Antibubble and Prediction of China's stock market and Real-Estate, Physica A, 337 (1-2), 243-268 (2004) (http://arXiv.org/abs/cond-mat/0312149)

J. V. Andersen and D. Sornette, Fearless versus Fearful Speculative Financial Bubbles, Physica A 337 (3-4), 565-585 (2004) (http://arXiv.org/abs/cond-mat/0311089)

W.-X. Zhou and Didier Sornette, Testing the Stability of the 2000-2003 US Stock Market ``Antibubble'', Physica A 348, 428-452 (2005). (http://arXiv.org/abs/cond-mat/0310092)

D. Sornette and W.-X. Zhou, Evidence of Fueling of the 2000 New Economy Bubble by Foreign Capital Inflow: Implications for the Future of the US Economy and its Stock Market, Physica A 332, 412-440 (2004) (http://arXiv.org/abs/cond-mat/0306496)

D. Sornette, Y. Malevergne and J.-F. Muzy, Volatility Fingerprints of Large Shocks: Endogenous Versus Exogenous, in ``Application of Econophysics,'' Proceedings of the second Nikkei symposium on econophysics, H. Takayasu, ed., Springer Verlag, ISBN 4-431-14028-X, 334 p. 137 illus. (2004)

Y. Malevergne, V.F. Pisarenko and D. Sornette Empirical Distributions of Log-Returns: between the Stretched Exponential and the Power Law? Quantitative Finance 5 (4), 379-401 (2005)
(http://arXiv.org/abs/physics/0305089)

D. Sornette and Wei-Xing Zhou , The US 2000-2003 Market Descent: Clarifications, Quantitative Finance 3 (3), C39-C41 (2003)
(http://arXiv.org/abs/cond-mat/0305004)

D. Sornette and W.-X. Zhou, Predictability of Large Future Changes in Major Financial Indices, International Journal of Forecasting 22, 153-168 (2006)
(http://arXiv.org/abs/cond-mat/0304601)

Wei-Xing Zhou and Didier Sornette, 2000-2003 Real Estate Bubble in the UK but not in the USA, Physica A 329, 249-263 (2003) (http://arXiv.org/abs/physics/0303028)

D. Sornette, Critical market crashes, Physics Reports 378 (1), 1-98 (2003) (http://arXiv.org/abs/cond-mat/0301543)

W.-X. Zhou and D. Sornette, Renormalization Group Analysis of the 2000-2002 anti-bubble in the US S&P 500 index: Explanation of the hierarchy of 5 crashes and Prediction, Physica A 330, 584-604 (2003) (http://arXiv.org/abs/physics/0301023)

D. Sornette, H. Takayasu and W.-X. Zhou, Finite-Time Singularity Signature of Hyperinflation, Physica A 325, 492-506 (2003) (http://arXiv.org/abs/physics/0301007)

Y. Malevergne and D. Sornette, VaR-Efficient Portfolios for a Class of Super- and Sub-Exponentially Decaying Assets Return Distributions, Quantitative Finance 4 (1), 17-36 (2003). (http://arXiv.org/abs/physics/0301009)

W.-X. Zhou and D. Sornette, Evidence of a Worldwide Stock Market Log-Periodic Anti-Bubble Since mid-2000, Physica A 330, 543-583 (2003)
(http://arXiv.org/abs/cond-mat/0212010)

A. Johansen and D. Sornette, Endogenous versus Exogenous Crashes in Financial Markets, in press in "Contemporary Issues in International Finance" (Nova Science Publishers, 2004) (http://arXiv.org/abs/cond-mat/0210509)

D. Sornette and W.-X. Zhou, The US 2000-2002 Market Descent: How Much Longer and Deeper? Quantitative Finance 2 (6), 468-481 (2002)
(http://arXiv.org/abs/cond-mat/0209065)
QUANTITATIVE FINANCE (http://www.iop.org/EJ/S/1/NCA203394/RCM0rqd2bn5eBW0XZGGwvA/toc/1469-7688/2/6)

D. Sornette, Vers une prediction des evenements catastrophiques? Risques 50, 111-112, June (2002)

Y. Malevergne and D. Sornette, Multi-Moments Method for Portfolio Management: Generalized Capital Asset Pricing Model in Homogeneous and Heterogeneous markets
(http://arXiv.org/abs/cond-mat/0207475)

J.V. Andersen, Y. Malevergne and D. Sornette, Comprendre et gerer les risques grands et extremes, Risques 49, 105-110 (2002)

Y. Malevergne and D. Sornette, Minimizing Extremes, RISK, November issue, 129-133 (2002)
(http://www.risk.net)
(http://arXiv.org/abs/cond-mat/0205636)

Wei-Xing Zhou and Didier Sornette, Non-Parametric Analyses of Log-Periodic Precursors to Financial Crashes, Int. J. Mod. Phys. C 14 (8), 1107-1126 (2003)
(http://arXiv.org/abs/cond-mat/0205531)

J.V. Andersen and D. Sornette, The $-game, Eur. Phys. J. B 31, 141-145 (2003) DOI: 10.1140/epjb/e2003-00017-7
(http://arXiv.org/abs/cond-mat/0205423)
paper of the month (july 2002) on (http://www.unifr.ch/econophysics/)

D. Sornette, Y. Malevergne and J.F. Muzy, What causes crashes? Risk Volume 16 (2), 67-71 (February 2003)
Are large market events caused by exogenous shocks or can they occur endogenously? Here, the authors ask this question of large stock market events and conclude that endogenous crashes do exist.
(http://arXiv.org/abs/cond-mat/0204626)

Y. Malevergne and D. Sornette, Investigating Extreme Dependences: Concepts and Tools, The Review of Financial Studies
(http://arXiv.org/abs/cond-mat/0203166)
(http://papers.ssrn.com/paper.taf?abstract_id=303465)

Y. Malevergne and D. Sornette, How to account for extreme co-movements between individual stocks and the market, The Journal of Risk 6 (3), 71-116 (2004).
(http://arXiv.org/abs/cond-mat/0202356)
(http://www.ssrn.com/link/econometrics.html)

Y. Malevergne and D. Sornette, Testing the Gaussian copula hypothesis for financial assets dependences, Quantitative Finance, 3, 231-250 (2003)
(http://arXiv.org/abs/cond-mat/0202356) and
(http://www.ssrn.com/link/econometrics.html)

D. Sornette, Pushing the limits: extremes and crashes in finance and economics, Computer Physics Communications, 147, 19-21 (2002).

D. Sornette, Predictability of catastrophic events: material rupture, earthquakes, turbulence, financial crashes and human birth, Proceedings of the National Academy of Sciences USA, V99 SUPP1:2522-2529 (2002 FEB 19)
(http://arXiv.org/abs/cond-mat/0107173)

A. Corcos, J.-P. Eckmann, A. Malaspinas, Y. Malevergne and D. Sornette, Imitation and contrarian behavior: hyperbolic bubbles, crashes and chaos, Quantitative Finance 2, 264-281 (2002)
(http://arXiv.org/abs/cond-mat/0109410)

D. Sornette and J.V. Andersen, A Nonlinear Super-Exponential Rational Model of Speculative Financial Bubbles, Int. J. Mod. Phys. C 13 (2), 171-188 (2002)
(http://arXiv.org/abs/cond-mat/0104341)

D. Sornette and K. Ide, Theory of self-similar oscillatory finite-time singularities in Finance, Population and Rupture, Int. J. Mod. Phys. C 14 (3), 267-275 (2002) (http://arXiv.org/abs/cond-mat/0106054)

K. Ide and D. Sornette, Oscillatory Finite-Time Singularities in Finance, Population and Rupture, Physica A 307 (1-2), 63-106 (2002) (http://arXiv.org/abs/cond-mat/0106047)

D. Sornette and A. Johansen, Significance of log-periodic precursors to financial crashes, Quantitative Finance 1 (4), 452-471 (2001)
(http://arXiv.org/abs/cond-mat/0106520)

A. Johansen and D. Sornette, Finite-time singularity in the dynamics of the world population and economic indices,
Physica A 294 (3-4), 465-502 (15 May 2001)
(http://arXiv.org/abs/cond-mat/0002075)

Y. Malevergne and D. Sornette, Multi-dimensional Rational Bubbles and fat tails, Quantitative Finance 1, 533-541 (2001) (http://arXiv.org/abs/cond-mat/0101371)

D. Sornette and Y. Malevergne, From Rational Bubbles to Crashes,
Physica A 299, 40-59 (2001) (http://arXiv.org/abs/cond-mat/0102305)

Malevergne, Y. and Sornette D., General framework for a portfolio theory with non-Gaussian risks and non-linear correlations, paper presented at the 18th INTERNATIONAL CONFERENCE IN FINANCE , 26, 27 & 28 JUNE 2001 NAMUR - Belgium
(http://www.fundp.ac.be/eco/affi2001/)
(e-print at http://arXiv.org/abs/cond-mat/0103020)

D. Sornette, Fokker-Planck equation of distributions of financial returns and power laws, Physica A 290 (1-2), 211-217 (2001)
(http://arXiv.org/abs/cond-mat/0011088)

D. Sornette, "Slimming" of power law tails by increasing market returns, Physica A 309, 403-418 (2002)
(http://arXiv.org/abs/cond-mat/0010112))

Johansen, A. and D. Sornette, Large Stock Market Price Drawdowns Are Outliers, Journal of Risk 4(2), 69-110, Winter 2001/02
(http://arXiv.org/abs/cond-mat/0010050)

J.-F. Muzy, D. Sornette, J. Delour and A.~Arneodo, Multifractal returns and Hierarchical Portfolio Theory, Quantitative Finance 1 (1), 131-148 (2001)
(http://arXiv.org/abs/cond-mat/0008069)

A. Johansen and D. Sornette, The Nasdaq crash of April 2000: Yet another example of log-periodicity in a speculative bubble ending in a crash, European Physical Journal B 17, 319-328 (2000)
(http://arXiv.org/abs/cond-mat/0004263) and
(http://papers.ssrn.com/paper.taf?abstract_id=224145)

A. Johansen and D. Sornette, Evaluation of the quantitative prediction of a trend reversal on the Japanese stock market in 1999, Int. J. Mod. Phys. C Vol. 11 (2), 359-364 (2000)
(http://arXiv.org/abs/cond-mat/0002059)

B.M. Roehner and D. Sornette, ``Thermometers'' of Speculative Frenzy, European Physical Journal B 16, 729-739 (2000)
(http://arXiv.org/abs/cond-mat/0001353)

D. Sornette and J.V. Andersen, Increments of uncorrelated time series can be predicted with a universal 75% probability of success., Int. J. Mod. Phys. C Vol. 11 (4), 713-720 (2000)
(http://arXiv.org/abs/cond-mat/0001324)

D. Sornette, Economy of scales in R&D with block-busters, Quantitative Finance 2, 224-227 (2002).
(http://arXiv.org/abs/cond-mat/0001434)

T. Lux and D. Sornette. On Rational Bubbles and Fat Tails, in press in the Journal of Money, Credit and Banking, Part 1, vol. 34, No. 3, 589-610
(August 2002)
(http://xxx.lanl.gov/abs/cond-mat/9910141)

J. V. Andersen, S. Gluzman and D. Sornette, Fundamental Framework for Technical Analysis, European Physical Journal B 14, 579-601 (2000)
(http://xxx.lanl.gov/abs/cond-mat/9910047)

D. Sornette, D. Stauffer and H. Takayasu, Market Fluctuations: multiplicative and percolation models, size effects and predictions, chapter of the book entitled Chapter 14 in Theories of Disaster: Scaling Laws Governing Weather, Body, and Stock Market Dynamics edited by A. Bunde, J. Kropp, H.-J. Schellnhuber, (April 15, 2002, Springer Verlag)
(http://xxx.lanl.gov/abs/cond-mat/9909439)
(reprint at http://www.pik-potsdam.de/~kropp/myown/book.html)
Proceedings of Facets of universality: Climate, Biodynamics and Stock Markets' at Giessen University, June 1999

J.V. Andersen and D. Sornette, Have your cake and eat it too:
increasing returns while lowering large risks! Journal of Risk
Finance 2 (3), 70-82 (spring 2001)
(http://xxx.lanl.gov/abs/cond-mat/9907217) and
(http://econwpa.wustl.edu/eprints/fin/papers/9907/9907005.abs)

A. Johansen and D. Sornette, Bubbles and anti-bubbles in Latin-American, Asian and Western stock markets: An empirical study, International Journal of Theoretical and Applied Finance 4 (6), 853-920 (2001)
(http://xxx.lanl.gov/abs/cond-mat/9907270)
(http://econwpa.wustl.edu/eprints/fin/papers/9907/9907004.abs)

B. Roehner and D. Sornette, Analysis of the phenomenon of speculative trading in one of its basic manifestations: stamp bubbles, Int. J. Mod. Phys. C 10, N6, 1099-1116 (1999)
(http://xxx.lanl.gov/abs/cond-mat/9906435)

D. Stauffer and D. Sornette, Self-Organized Percolation Model for Stock Market Fluctuations, Physica A 271, 496-506 (1999)
(http://xxx.lanl.gov/abs/cond-mat/9906434)

A. Johansen, D. Sornette and O. Ledoit, Predicting Financial Crashes using discrete scale invariance, Journal of Risk, vol. 1, number 4, 5-32 (1999)
(http://xxx.lanl.gov/abs/cond-mat/9903321)
(http://econwpa.wustl.edu/eprints/fin/papers/9903/9903006.abs)

D. Sornette, P. Simonetti and J. V. Andersen, phi^q-field theory for Portfolio optimization: ``fat tails'' and non-linear correlations, Physics Report 335 (2), 19-92 (August 2000)
(http://xxx.lanl.gov/abs/cond-mat/9903203)

A. Johansen and D. Sornette, Financial "anti-bubbles'': Log-periodicity in Gold and Nikkei collapses, Int. J. Mod. Phys. C 10(4), 563-575 (1999)
(http://xxx.lanl.gov/abs/cond-mat/9901268)

D. Sornette, J. V. Andersen and P. Simonetti, Portfolio Theory for ``Fat Tails'', International Journal of Theoretical and Applied Finance 3 (3), 523-535 (2000)
(http://xxx.lanl.gov/abs/cond-mat/9811292)

A. Johansen and D. Sornette, Critical Crashes, Risk, Vol 12, No. 1, p.91-94 (1999)
(http://xxx.lanl.gov/abs/cond-mat/9901035(

A. Johansen and D. Sornette, Modeling the stock market prior to large crashes, Eur. Phys. J. B 9:1, 167-174 (1999)
(http://xxx.lanl.gov/abs/cond-mat/9811066)

A. Johansen, O. Ledoit and D. Sornette, Crashes as critical points, International Journal of Theoretical and Applied Finance Vol. 3, No. 2 219-255 (2000)
(ttp://xxx.lanl.gov/abs/cond-mat/9810071)

Didier Sornette and Daniel Zajdenweber, The economic return of research: the Pareto law and its implications, European Physical Journal B, 8 (4), 653-664 (1999)
(http://xxx.lanl.gov/abs/cond-mat/9809366)

P. Santa-Clara and D. Sornette, The Dynamics of the Forward Interest Rate Curve with Stochastic String Shocks, The Review of Financial Studies 14(1), 149-185 (2001)
(http://xxx.lanl.gov/abs/cond-mat/9801321)

D. Sornette and A. Johansen, A Hierarchical Model of Financial Crashes, Physica A 261, 581-598 (1998)

D. Sornette, Gauge theory of Finance? Int. J. Mod. Phys. 9, 505-508 (1998)
(http://xxx.lanl.gov/abs/cond-mat/9804045)

B.M. Roehner and D. Sornette, The sharp peak-flat trough pattern and critical speculation, European Physical Journal B 4, 387-399 (1998)
(http://xxx.lanl.gov/abs/cond-mat/9802234)

D. Sornette, "String" formulation of the Dynamics of the Forward Interest Rate Curve, European Physical Journal B 3, 125-137 (1998).
(http://xxx.lanl.gov/abs/cond-mat/9802136)

D. Sornette, Large deviations and portfolio optimization, Physica A 256, 251-283 (1998)
(http://xxx.lanl.gov/abs/cond-mat/9802059)

A. Arneodo, J.-F. Muzy and D. Sornette, "Direct'' causal cascade in the stock market, European Physical Journal B 2, 277-282 (1998)
(http://xxx.lanl.gov/abs/cond-mat/9708012)

J.-P. Bouchaud, D. Sornette, C. Walter and J.-P. Aguilar, Taming large events : Optimal portfolio theory for strongly fluctuating assets, International Journal of Theoretical and Applied Finance 1, 25-41 (1998)

A . Johansen and D. Sornette, Stock market crashes are outliers, European Physical Journal B 1, 141-143 (1998)
(http://xxx.lanl.gov/abs/cond-mat/9712005)

D. Sornette and A. Johansen, Large financial crashes, Physica A 245, N3-4, 411-422 (1997)
(http://xxx.lanl.gov/abs/cond-mat/9704127)

A. Arneodo, J.-P. Bouchaud, R. Cont, J.-F. Muzy, M. Potter and D. Sornette, unpublished comment on ''Turbulent cascades in foreign exchange markets'', (reply to Ghashghaie, S., Breymann, W., Peinke, J., Talkner, P. and Dodge, Y. Nature {\bf 381} 767 (1996)
(http://xxx.lanl.gov/abs/cond-mat/9607120)

J.-P. Bouchaud, D. Sornette and M. Potters, Option pricing in the presence of extreme fluctuations, in Mathematics of Derivative Securities, edited by MA.H. Dempster and S.R. Pliska, Cambridge University Press 1997, pp. 112-125

J.-P. Bouchaud and D. Sornette, Physics Today, p.91-92, july (1996); reply to O. Cheyette and R.N. Kahn, Derivatives trading again: Finance pros take on physicists, Physics Today, p.90-91, july (1996).

J.-P. Bouchaud, G. Iori and D. Sornette, Real-world options, Risk 9 (3), 61-65, March (1996)
(http://xxx.lanl.gov/abs/cond-mat/9509095)

J.-P. Bouchaud and D. Sornette, Derivatives trading: Physicists favor less complex and risky theory, Physics Today, March (1996), p.15

D. Sornette, A. Johansen and J.-P. Bouchaud, Stock market crashes, Precursors and Replicas, J.Phys.I France 6, n1, 167-175 (1996)

J.-P. Bouchaud and D. Sornette, Reply to Mikheev's comment on the Black-Scholes pricing problem, J.Phys.I France 5, 219-220 (1995)

J.-P. Bouchaud and D. Sornette, The Black-Scholes option pricing problem in mathematical finance : Generalization and extensions for a large class of stochastic processes, J.Phys.I France 4, 863-881 (1994)

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