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A Theory of Stock Bubble Formation and Market Crash: New Perspective from Hydrodynamics Using Econophysics Approach  Chun-Chun Lin, Kehluh Wang, Joung-Yol Lin3 Abstract In this paper we analyze the characteristics of extreme behavior in stock prices. First, we discuss the stock market dynamics using hydrodynamics model. By deriving the nonlinear Burgers equation with diffusion terms, we investigate the market bubbles as well as the crash events through abstract physics concept. To solve the uncertainty problem in the market crashes, we utilize the similarity in the stretched group and the traveling wave. In this way we find the solution of Burgers equation which is different from other studies using the time series analysis. The results show that log-periodic power law, self similarity, criticality of phase transition, interacting agent model, aftershock market model, and rational expectation bubbling can all be described through parameters in the Burger equation. Empirical evidence shows that the complexity between viscous oscillation and burst convection is more significant in the long run than in the short run. Keywords：Econophysics；Stock bubbles；Market crashes；Burgers equation 1. Introduction Extreme behaviors in stock market dynamics have spurred many studies on financial bubbling and crash events. These behaviors include dramatic changes in prices, returns, and trading volumes due to various endogenous and exogenous factors (Dider, 2003). A market crash can be considered as a radical price drawdown. The mean reversion process makes the real price decline toward the baseline of the previous cycle (Anders, 2003). Using system dynamics approach, Johansen and Sornette (1996; 1997) showed that US market crashes in 1929 and 1987 can be modeled as an energy release in earthquake. Plerou, Gopinikrishnan and Rosennow (2000) applied statistical physics to demonstrate the similarities between extreme market behaviors and magnetization effect or melting point during