The Fractal Market Hypothesis and its implications for the stability of financial markets

Our Financial Stability Papers are designed to develop new insights into risk management, to promote risk reduction policies, to improve financial crisis management planning or to report on aspects of our systemic financial stability work.
Published on 23 August 2013

Financial Stability Paper No. 23
By Nicola Anderson and Joseph Noss

Time series of financial market prices appear to exhibit fractal properties: that is, under magnification, their pattern becomes increasingly complex, and seems to repeat itself, with a pattern that is qualitatively similar to that of the overall structure. This paper examines why and how these fractal properties might arise, and considers their implications for understanding the causes of financial (in)stability. It offers a quantitative model of investor behaviour and price formation that seeks to account for fractal properties of market prices. It conjectures that the dynamic of market prices — in particular its self-similarity — might be caused by the interactions of agents with different investment horizons and differing interpretations of information. This structure appears to be associated with a special sort of stability that can be disrupted, causing prices to crash, if the normal interaction of these agents breaks down.

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