Thesis advisor: Harold Petersen / Minsky developed a Financial Instability Hypothesis which sought to find an endogenous explanation for a modern economy’s vulnerability to crashes. Specifically, he investigated the ways in which the financial structures of a modern economy might contribute to its instability. The hypothesis rests upon the twin assertions that some financial arrangements are more dangerous than others, and that during economic booms, investors’ incentives are altered to favor these more dangerous arrangements. Essentially, in good times, the profit-seeking motive of investors overrides a diminished risk aversion, as memories of losses fade into the past. This paper empirically tests Minsky’s second assertion, by using econometric techniques to analyze the relationship between risk appetite and market returns. Spreads between the yields of bonds of different credit qualities are used as a proxy for wider investor sentiment toward risk. Regressions demonstrate that changes in risk appetite can be explained at least in part by historical market returns. Such a finding supports Minsky’s proposal that incentives of investors change in response to varying market conditions. It further implies that regulatory authorities might examine the level of risk appetite to determine whether increases in asset prices indicate the formation of speculative bubbles or are rather reflecting developments in the fundamentals underlying said assets. / Thesis (BA) — Boston College, 2010. / Submitted to: Boston College. College of Arts and Sciences. / Discipline: Economics Honors Program. / Discipline: College Honors Program. / Discipline: Economics.

This thesis investigates the price discovery process between the stock and the credit default swap market (CDS). We link the financial theory of efficient markets and the underlying models and conditions involved in CDSs, the stock market and financial crashes. This study uses publicly listed firms and the European market CDS series to construct a matched stock portfolio and uses financial data collected between the years 2019 to 2021. The purpose is to better understand the price discovery process during a potential new type of crisis in modern financial history. It could potentially allow portfolio managers, traders, arbitrageurs and stakeholders who monitor systematic indices to gauge the level of risk in the overall economy. It can also better inform regulators about how the CDS and the stock market reacted to each other during the COVID-19 pandemic. This deductive and quantitative research is based on secondary data gathered from the Eikon financial database. It uses a vector autoregressive model to test a hypothesis regarding the price discovery process between the stock and CDS portfolios.  Our results show that when using only the variables for the CDS and stock market, both variables cause each other, which is to say a feedback effect is present between the CDS Europe index and the matched portfolio of stocks. When adding the three control variables, the stock variable no longer causes the CDS variable, while the CDS variable still causes the stock variable. We conclude that the European credit default swap index leads the matched portfolio of stocks in the price discovery process with our chosen variables.

在此篇論文之前, 已經有許多學者指出在金融市場奔盤之前的價格波動與熱物理學中的臨界現象有所類似. 其價格會呈現Power law的形式迅速加速上升, 同時伴隨著log-periodic震盪. 藉由first-order Landau expansion和second-order Landau expansion, 我們使用了50個隨機樣本, 分別從五個不同的指數來驗證其正確性. 結果發現該模型很難運用在高波動的市場, 但是對於中級波動的市場卻有不錯的預測能力, 比方說S&P500與Nikkei 225指數. / Before this paper, many scholars indicated that market price movement before a crash is similar to critical phenomena. It can be described by a power law acceleration of the market price decorated with log-periodic oscillations. By first-order Landau expansion and second-order Landau expansion, we use 50 random samples from each of 5 different indices to test the model. It is hard to adapt Landau expansion to high volatility indices, but fit pretty well for medium volatility indices, such as S&P 500 and Nikkei 225.

本篇論文的主要研究目的是希望探討Didier所發展出的金融危機預測模型是否也能夠適用於預測復甦現象?如同先前許多研究所指出的，美國股市指數波動在崩盤以及復甦下呈現截然不同的現象。當在復甦時，指數成長緩慢，波動程度小。但是當蕭條時，指數波動程度大，並且快速。這些差異增加了使用同一種方法來預測金融復甦與危機的困難度。 / Purpose of this study was to investigate Can the crisis prediction model proposed by Didier Sornette still work on blooming. As previous studies pointed out that the U.S. stock market index fluctuated different when under the blooming stage and the recession stage. When Economic recovery, a change into the positive cycle, the stock market index rose slowly, the index change in the short term rate is small. When recession came, changes in stock market index fiercely. These differences make it hard to using the same way predict the economic recovery and collapse.