BIG OR SMALL, FINANCIAL BUBBLES BURST ALIKE
Even when they inflate and collapse in milliseconds, the same rules apply
PORTLAND, Ore. — Statistically speaking, size doesn’t matter when a financial bubble bursts.
The big crashes may hurt a lot more, but new analyses of “microbubbles” presented March 15 at a meeting of the American Physical Society find that the same mathematical laws underlying massive economic crises are also at work in tiny fluctuations that occur on the order of milliseconds.
The new understanding of economic fluctuations both big and small doesn’t predict when the next economic meltdown will wreak havoc on retirement accounts, said study coauthor H. Eugene Stanley of Boston University. But the results help describe complex financial fluctuations and reinforce the idea that governments ought to have a contingency plan in place for the calamitous collapses that his research describes as inevitable, Stanley said.
The results are intriguing “because what is causing these big bubbles to collapse are some instabilities that start at the local level of the millisecond time scale of traders,” Stanley said in his presentation.
The distributions of both trading speed and share volume remained the same regardless of bubble size, the team found. This means that one mathematical law describes events that occur over 10 orders of magnitude — from milliseconds to hundreds of days, Stanley said. The same is true of earthquakes: There is a mathematical relationship between size and frequency that encompasses everything from imperceptible daily tremors to massive once-in-a-lifetime catastrophes.
Although the researchers don’t yet understand the details of bubble formation and bursting, the work shows that large financial collapses, although infrequent, are bound to happen, said Stanley. The results “tell us that the really big crashes or bubbles that burst have something to do with the medium-sized and the small-sized ones,” he said. “Had this law been known earlier and appreciated by governments, governments would have probably taken steps to make plans for what to do if one of these big shocks occurs.”