[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/boe/finsta/0023.html
   My bibliography  Save this paper

Financial Stability Paper No 23: The Fractal Market Hypothesis and its implications for the stability of financial markets

Author

Listed:
  • Anderson, Nicola

    (Bank of England)

  • Noss, Joseph

    (Bank of England)

Abstract
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.

Suggested Citation

  • Anderson, Nicola & Noss, Joseph, 2013. "Financial Stability Paper No 23: The Fractal Market Hypothesis and its implications for the stability of financial markets," Bank of England Financial Stability Papers 23, Bank of England.
    • Handle: RePEc:boe:finsta:0023
    Note: http://www.bankofengland.co.uk/financialstability/Pages/fpc/fspapers/fs_paper23.aspx
    as

    Download full text from publisher

    File URL: https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-paper/2013/the-fractal-market-hypothesis-and-its-implications-for-the-stability-of-financial-markets
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. J. Doyne Farmer, 2000. "Physicists Attempt To Scale The Ivory Towers Of Finance," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 311-333.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    3. Robert J. Shiller, 1987. "Investor Behavior in the October 1987 Stock Market Crash: Survey Evidence," NBER Working Papers 2446, National Bureau of Economic Research, Inc.
    4. Hyun Song Shin, 2007. "Discussion of Assessing the Information Content of Mark‐to‐Market Accounting with Mixed Attributes: The Case of Cash Flow Hedges and Market Transparency and the Accounting Regime," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 277-287, May.
    5. Benos, Evangelos & Wetherilt, Anne, 2012. "The role of designated market makers in the new trading landscape," Bank of England Quarterly Bulletin, Bank of England, vol. 52(4), pages 343-353.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lodewikus Jacobus Basson & Gary van Vuuren, 2020. "Exploring Hedging Strategies Identified by Fractal Dimensions," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 67(1), pages 1-13, March.
    2. Anderson, Nicola & Webber, Lewis & Noss, Joseph & Beale, Daniel & Crowley-Reidy, Liam, 2015. "Financial Stability Paper 34: The resilience of financial market liquidity," Bank of England Financial Stability Papers 34, Bank of England.
    3. Cristiana Vaz & Rui Pascoal & Helder Sebastião, 2021. "Price Appreciation and Roughness Duality in Bitcoin: A Multifractal Analysis," Mathematics, MDPI, vol. 9(17), pages 1-18, August.
    4. Ritika Chopra & Gagan Deep Sharma, 2021. "Application of Artificial Intelligence in Stock Market Forecasting: A Critique, Review, and Research Agenda," JRFM, MDPI, vol. 14(11), pages 1-34, November.
    5. Adam Karp & Gary Van Vuuren, 2019. "Investment Implications Of The Fractal Market Hypothesis," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 14(01), pages 1-27, March.
    6. Sergio Bianchi & Augusto Pianese & Massimiliano Frezza, 2020. "A distribution‐based method to gauge market liquidity through scale invariance between investment horizons," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 36(5), pages 809-824, September.
    7. Daniela Alexandra CRIȘAN, 2015. "Financial Volatility Measurement Using Fractal Dimension," Romanian Economic Business Review, Romanian-American University, vol. 9(1), pages 95-102, May.
    8. Svetlozar T. Rachev & Stoyan V. Stoyanov & Frank J. Fabozzi, 2017. "Financial Markets With No Riskless (Safe) Asset," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(08), pages 1-24, December.
    9. Flavia BARNA & Ştefana Maria DIMA & Bogdan DIMA & Lucian PAŞCA, 2016. "Fractal Market Hypothesis: The Emergent Financial Markets Case," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 50(2), pages 137-150.
    10. Uritskaya, Olga Y. & Uritsky, Vadim M., 2015. "Predictability of price movements in deregulated electricity markets," Energy Economics, Elsevier, vol. 49(C), pages 72-81.
    11. DIMA, Bogdan & DIMA, Ştefana Maria & IOAN, Roxana, 2021. "Remarks on the behaviour of financial market efficiency during the COVID-19 pandemic. The case of VIX," Finance Research Letters, Elsevier, vol. 43(C).
    12. Karvik, Geir-Are & Noss, Joseph & Worlidge, Jack & Beale, Daniel, 2018. "The deeds of speed: an agent-based model of market liquidity and flash episodes," Bank of England working papers 743, Bank of England.
    13. L.J. Basson & Sune Ferreira-Schenk & Zandri Dickason-Koekemoer, 2022. "Fractal Dimension Option Hedging Strategy Implementation During Turbulent Market Conditions in Developing and Developed Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 12(2), pages 84-95, March.
    14. Abraham Oketooyin GBADEBO & Yusuf Olatunji OYEDEKO, 2022. "Effect Of Liquidity Risk On Low Volatility Anomaly In Nigerian Stock Market," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 7(3), pages 25-42.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Koutmos, Dimitrios & Song, Wei, 2014. "Speculative dynamics and price behavior in the Shanghai Stock Exchange," Research in International Business and Finance, Elsevier, vol. 31(C), pages 74-86.
    2. Akosah, Nana Kwame & Alagidede, Imhotep Paul & Schaling, Eric, 2020. "Testing for asymmetry in monetary policy rule for small-open developing economies: Multiscale Bayesian quantile evidence from Ghana," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    3. Cui, Xueting & Zhu, Shushang & Sun, Xiaoling & Li, Duan, 2013. "Nonlinear portfolio selection using approximate parametric Value-at-Risk," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 2124-2139.
    4. Pichler, Anton & Poledna, Sebastian & Thurner, Stefan, 2021. "Systemic risk-efficient asset allocations: Minimization of systemic risk as a network optimization problem," Journal of Financial Stability, Elsevier, vol. 52(C).
    5. Peter A. Abken & Milind M. Shrikhande, 1997. "The role of currency derivatives in internationally diversified portfolios," Economic Review, Federal Reserve Bank of Atlanta, vol. 82(Q 3), pages 34-59.
    6. Dhanya Jothimani & Ravi Shankar & Surendra S. Yadav, 2018. "A Big data analytical framework for portfolio optimization," Papers 1811.07188, arXiv.org, revised Nov 2018.
    7. Leonard J. Mirman & Egas M. Salgueiro & Marc Santugini, 2013. "Integrating Real and Financial Decisions of the Firm," Cahiers de recherche 1333, CIRPEE.
    8. Dominique Guégan & Wayne Tarrant, 2012. "On the necessity of five risk measures," Annals of Finance, Springer, vol. 8(4), pages 533-552, November.
    9. Andriosopoulos, Kostas & Nomikos, Nikos, 2014. "Performance replication of the Spot Energy Index with optimal equity portfolio selection: Evidence from the UK, US and Brazilian markets," European Journal of Operational Research, Elsevier, vol. 234(2), pages 571-582.
    10. Raffestin, Louis, 2014. "Diversification and systemic risk," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 85-106.
    11. Sridhar, Shrihari & Naik, Prasad A. & Kelkar, Ajay, 2017. "Metrics unreliability and marketing overspending," International Journal of Research in Marketing, Elsevier, vol. 34(4), pages 761-779.
    12. Vithayasrichareon, Peerapat & MacGill, Iain F., 2013. "Assessing the value of wind generation in future carbon constrained electricity industries," Energy Policy, Elsevier, vol. 53(C), pages 400-412.
    13. Gruber, Lutz F. & West, Mike, 2017. "Bayesian online variable selection and scalable multivariate volatility forecasting in simultaneous graphical dynamic linear models," Econometrics and Statistics, Elsevier, vol. 3(C), pages 3-22.
    14. repec:dau:papers:123456789/2256 is not listed on IDEAS
    15. Gupta, Pankaj & Mittal, Garima & Mehlawat, Mukesh Kumar, 2013. "Expected value multiobjective portfolio rebalancing model with fuzzy parameters," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 190-203.
    16. Ke Zhou & Jiangjun Gao & Duan Li & Xiangyu Cui, 2017. "Dynamic mean–VaR portfolio selection in continuous time," Quantitative Finance, Taylor & Francis Journals, vol. 17(10), pages 1631-1643, October.
    17. Sanchez-Romero, Miguel, 2006. "“Demand for Private Annuities and Social Security: Consequences to Individual Wealth”," Working Papers in Economic Theory 2006/07, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    18. Muhinyuza, Stanislas & Bodnar, Taras & Lindholm, Mathias, 2020. "A test on the location of the tangency portfolio on the set of feasible portfolios," Applied Mathematics and Computation, Elsevier, vol. 386(C).
    19. Hany Shawky & Ronald Forbes & Alan Frankle, 1983. "Liquidity Services and Capital Market Equilibrium: The Case for Money Market Mutual Funds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 6(2), pages 141-152, June.
    20. Colin Atkinson & Emmeline Storey, 2010. "Building an Optimal Portfolio in Discrete Time in the Presence of Transaction Costs," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(4), pages 323-357.
    21. Koutmos, Dimitrios, 2012. "An intertemporal capital asset pricing model with heterogeneous expectations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1176-1187.

    More about this item

    Keywords

    financial regulation; fractal market hypothesis;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boe:finsta:0023. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Digital Media Team (email available below). General contact details of provider: https://edirc.repec.org/data/boegvuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.