Why topological data analysis detects financial bubbles?

DOI10.1016/J.CNSNS.2023.107665MaRDI QIDQ6144157zbMATH OpenOpenAlexFDO

Authors Marian Gidea, Matteo Manzi, Vahid Nateghi

Publication date 5 January 2024

Published in Communications in Nonlinear Science and Numerical Simulation (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2304.06877

zbMATH Keywords

financial bubblesfinancial time seriestopological data analysis

Mathematics Subject Classification ID

Topological data analysis (62R40) Financial markets (91G15)

Abstract: We present a heuristic argument for the propensity of Topological Data Analysis (TDA) to detect early warning signals of critical transitions in financial time series. Our argument is based on the Log-Periodic Power Law Singularity (LPPLS) model, which characterizes financial bubbles as super-exponential growth (or decay) of an asset price superimposed with oscillations increasing in frequency and decreasing in amplitude when approaching a critical transition (tipping point). We show that whenever the LPPLS model is fitting with the data, TDA generates early warning signals. As an application, we illustrate this approach on a sample of positive and negative bubbles in the Bitcoin historical price.

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Cited in

(2)

• Sparse portfolio selection via topological data analysis based clustering
• Null-validated topological signatures of financial market dynamics

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