Duelling Googles – ‘European crisis’ versus ‘Financial crisis’

Like a good bedtime read? The latest from the Financial Crisis Observatory might perk you up then (here) – “Collective behaviour of stock prices as a precursor to market crash”.

One of the conclusions of this field of research is that markets generally exhibit increasingly volatile price behaviour as a crescendo matures. And further (and the point of this paper) once the event that precipitates a crash has occurred, then this price volatility also recedes in a relatively predictable fashion. Or to quote the paper,

“Results demonstrate that the relaxation dynamics of a financial market immediately after the occurrence of a crash resemble an earthquake after-shock. The frequency of a large aftershock decays according to a power law.”

The authors then note that the news cycle was synchronised to the ‘Lehman’ crash and also followed the same decay profile – as measured by the frequency of mentions of ‘financial crisis’.

Google Trends "Financial crisis"

Google Trends “Financial crisis”

Which then got me thinking about how “European crisis” was tracking in Google Trends. (Note the scales between the two charts are very different – the European crisis is still a babe in the woods.)

Google Trends European crisis

Google Trends “European crisis”

The European crisis has been on the stove for some time – and is only now reaching boiling point. The financial system is the crucible in which all this rising volatility is happening, so it’s interesting to compare the news chart above with that of European bank CDS spreads (that also reached new extremes overnight).

European CDS spreads

Whichever way you look at it – it’s increasingly likely that someone is going to get stopped out and soon.

In-house Analyst


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