Identify Economic Bubble
Authors: Daniel Fang (Project Lead), Eric Xia, Dani Wu, Johan Chua, Calvin Tran, Lily Zhou
“A bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. This fast inflation is followed by a quick decrease in value, or a contraction, that is sometimes referred to as a “crash” or a “bubble burst.” However, bubbles are extremely unstable and dangerous for investors, having an almost unpredictable up-down trajectory. It is problematic in our world because one can hardly notice that he is investing in a bubble stock at an era where things change unexpectedly overnight. Therefore, it is helpful to simply provide the public investors information about the target stocks in regard to bubble possibilities.
In this project we are trying to study bubbles in the stock market.From the bubble stock data, we observed that the economic cycle is characterized by the rapid escalation of market value, particularly in the price of the stock. S This fast inflation is often followed by a quick decrease in value that is sometimes referred to as a “crash” or a “bubble burst” because the asset’s price has risen way above its intrinsic value. For our project, we want to examine some of the biggest historical bubble stocks such as the Dutch tulip in the 17th century, the south sea bubble of 1720, and the dot-com bubble in the late 1990s and compare their trends to some of the newer popular stocks like Amazon and bitcoins and see if there are any similarities in those stocks. We filtered out some bubble-like stocks according to some online stock reports and plotted the price for half a decade and observed a somewhat similar overall trend.
Figure 1: Blueberry Closing Price Trajectory
Figure 2: AMC Closing Price Trajectory
Figure 3: Tesla Closing Price Trajectory
Figure 4: Amazon Closing Price Trajectory
Figure 5: Another Tesla Closing Price Trajectory
We can see that some of the stocks are what we consider as “good stocks’’, that are stocks of world-famous tech companies, but many economists have happened to suspect them having bubble behavior and the large population of investors may end up losing a huge amount of money when the bubble pops one day. We can see that stocks like blueberry and AMC have a sudden increase in price to an abnormal level. If one knows the company blueberry, it was high-value in 2021 for its chip technology and manufactory. However, it experienced a huge decline as a result of the overrated value in the market industry. Our project aimed to provide advice suggestions to investors so that they can compare their target stock trend with past bubble trends to minimize money loss and maximize profit before the bubble pops.
The bottom graph combines the bubble stock trends in the same graph. Since different stocks have different average prices and happen at different times, we had to implement normalization before plotting them on the same time line and same price level. After all, we get the following:
Figure 6: A Normalized Time Table of Bubble Stock Closing Prices
From figure 6, we can see that most of the stocks follow a similar trajectory and they all have experienced somewhat abnormal overnight increases in price before the bubble popped. And we can see the price falling is usually faster than the increase in price, and this is the reason why bubbles are so unpredictable because the loss in expectation always takes place arbitrarily.
We originally wanted to build a model that is able to tell whether the stock you are holding is a stock bubble and when you should sell it in order to maximize profit and minimize loss. But we realize that bubbles are a high risk phenomena and predicting the time when we sell, which is right before the bubble pops, is extremely unreliable and risky, so we decided to approach this problem in a different way. Instead of using machine learning and fitting preexisted models, we decided to compare different stocks that credible sources have categorized them as bubbles with some new stocks that are popular nowadays. The most important step in our model is to normalize the maximum and lowest prize and set different stocks on the same scale. This allows us to observe that a large portion of stock starts their price trajectory to soar around the same time. We can also find that a few stocks that we may consider as good stocks have experienced bubble-like experiences in the past. This information tell us that stocks may re-experience scenarios like this, and people should keep an eye on them.
Data Sources:
https://www.kaggle.com/datasets/jessevent/all-crypto-currencies
https://www.kaggle.com/datasets/philmod/nasdaqcomposites
https://www.kaggle.com/datasets/camnugent/sandp500
https://www.kaggle.com/datasets/philmod/south-seas-bubble
https://www.kaggle.com/datasets/philmod/south-sea-bubble
https://www.kaggle.com/code/philmod/economic-bubbles-comparison/notebook
https://www.kaggle.com/datasets/varpit94/tesla-stock-data-updated-till-28jun2021
https://www.statology.org/dickey-fuller-test-python/
Kaggle Code:
