London, August 29 (ANI): A team of physicists and financiers have shown that it is possible to predict when growth in any stock exchange will become unsustainable and the market will crash, by successfully predicting a steep fall in the Shanghai Stock Exchange.
Used for the purpose was a model that employed concepts from the physics of complex atomic systems, developed by Didier Sornette of the Financial Crisis Observatory in Zurich, Switzerland, and Wei-Xing Zhou of the East China University of Science and Technology in Shanghai.
Sornette, Zhou, and colleagues have revealed that their idea was that if a plot of the logarithm of the market's value over time would deviates upwards from a straight line, it's a clear warning that people are investing simply because the market is rising rather than paying heed to the intrinsic worth of companies.
The researchers say that projecting this trend may be helpful in predicting when growth will become unsustainable, and the market will crash.
They applied their model to the Shanghai Composite Index, which tracks the combined worth of all companies listed on the Shanghai Stock Exchange, the world's second largest.
The index gained 50 per cent in just four months earlier this year.
It was in July that the team predicted that the index would start to fall sharply by August 10, and the index duly began to slide on August 4, falling almost 20 per cent in the subsequent two weeks.
The researchers, however, warn that anyone hoping to exploit the model for profit should think twice.
"If enough investors take action based on our predictions, the evolution of prices will probably be affected," New Scientist magazine quoted Zhou as saying. (ANI)