Tuesday 12 April 2016

Can we predict the time of a crisis coming?

Sometimes some people can correctly predict the coming of a financial crisis; however, they hardly predict correctly when the financial crisis could come. Everything happens with a probability; and when several important things happen to happen at the same time, then a crisis breaks out. If we know these important elements and their probabilities, then could we predict the time of a crisis happening. Time 1 and time 2 are independent, which means when one thing does not happen in time 1 it does not increase the probability of happening in time 2. However, we can know the probability of it does not happen in both time 1 and time 2. Moreover, when the time is progressing, the probability of an element that could cause a crisis to happen increases, as we know when the bubble becomes larger, it gets easier to burst. Therefore, if we know the key elements that cause a crisis and the probabilities over time, then we could predict the probabilities of a crisis not happening over the future periods. When the probability of a crisis not happening is significantly smaller than a certain level, then it is sensible to say that a crisis is very likely to occur in that period.

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