While the future of a market may forever be unpredictable, financial bubbles have been show to exhibit unique precursory patterns before their collapse. The goal of The Bubble Index is to identify these bubbles and allow investors time to prepare. Up until now, a practical and quantitative measure of market instability has not existed. Previously, to determine the stability of the market on any given day, one may look at a number of technical indicators; one example being the volatility index. However, the volatility index does not provide a leading indication of market crashes like that of 1929, 1987, 2000, and others. In other words, the volatility will tell you the crash has occurred shortly after it has occurred. Other models, such as GARCH, also fail in warning investors about extreme market events.      The Bubble Index, based on the ideas and research of Didier Sornette and colleagues, treats financial markets as a complex network of interacting traders. Under this hypothesis the aggregate behavior of all traders and investors can be modeled as a complex physical network. During “normal” times, when traders are highly idiosyncratic and random, returns are well fitted by the Gaussian distribution. Here, the market can be considered as existing in a “stable phase.” This is where the market spends most of its time. As time progresses, the network of traders may become less idiosyncratic and more correlated. This causes the creation of the fat tails in the return distributions.      Eventually, this network of traders transitions between the state of idiosyncratic behavior and “herd” behavior. The switch to “herd” behavior is analogous to raising a pencil on its eraser. The pencil's position is now highly unstable. Any exogenous shock will send the pencil crashing down. This same sensitivity to exogenous variables exists in financial markets while in this phase. The market enters this position through self-organization. “Standing the market” upon its “eraser” is equivalent to “forming a network of traders” who “act as a herd.” In this state, most exogenous shocks will cause the entire system to “fall over,” i.e., “return to normal.” As the market self-organizes, oscillations occur and can be detected in the time series data. Measuring the strength of these oscillations through time, The Bubble Index allows one to quantify systemic risk. Thus, the Bubble Index is truly a fundamental measure of market instability.      The Bubble Index measures the instability of a financial market. Taking a time series of daily price data, The Bubble Index can be easily created. For example, consider a time series of daily data for the Dow Jones Industrial Average. This can be used to create a Bubble Index which predicts, weeks in advance, all of the top 15 largest single day % declines. As another example, consider the Bubble Index for the DJIA. Each of the red vertical lines corresponds to the largest single day % declines. There is a clear and rapid rise in The Bubble Index in the days before these major declines. To read more, visit http://www.thebubbleindex.com ...read more