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Bubbles and Crashes

  1. Taisei Kaizoji1,
  2. Didier Sornette2,3

Published Online: 15 MAY 2010

DOI: 10.1002/9780470061602.eqf01018

Encyclopedia of Quantitative Finance

Encyclopedia of Quantitative Finance

How to Cite

Kaizoji, T. and Sornette, D. 2010. Bubbles and Crashes. Encyclopedia of Quantitative Finance. .

Author Information

  1. 1

    International Christian University, Tokyo, Japan

  2. 2

    ETH Zurich, Zurich, Switzerland

  3. 3

    Swiss Finance Institute, Geneva, Switzerland

Publication History

  1. Published Online: 15 MAY 2010


We review some of the hypotheses offered to explain the market crashes that often follow asset price bubbles. Starting from historical accounts and syntheses of past bubbles and crashes, we put the problem in perspective with respect to the development of the efficient-market hypothesis. We then present the models based on heterogeneous agents and the limits to arbitrage that prevent rational agents from bursting bubbles before they inflate. Then, we explore another set of explanations of why rational traders would be led to actually profit from and surf on bubbles, by anticipating the behavior of noise traders or by realizing the difficulties in synchronizing their actions. We end by discussing a complex system approach, in which bubbles are the result of a collective emergent organization of human agents interaction through social imitation and herding. In this framework, the end of a bubble is modeled as a bifurcation (or phase transition), which offers new insights for diagnostic and prognostic. The key insight is that diagnosing bubbles may be feasible when the positive feedback mechanisms that give rise to transient “superexponential” price growth are taken into account.


  • financial bubbles;
  • crashes;
  • efficient market hypothesis;
  • positive feedback;
  • noise traders;
  • superexponential;
  • heterogeneous beliefs;
  • synchronization failure;
  • social imitation;
  • complex system theory;
  • collective phenomena;
  • bifurcation;
  • phase transition