Research at the Massachusetts Institute of Technology suggests that there is evidence the frequency of stock market crashes follows an inverse cubic power law. This and other studies such as Prof. Didier Sornette's work suggest that stock market crashes are a sign of self-organized criticality in financial markets. In 1963, Mandelbrot proposed that instead of following a strict random walk, stock price variations executed a Lévy flight. A Lévy flight is a random walk that is occasionally disrupted by large movements. In 1995, Rosario Mantegna and Gene Stanley analyzed a million records of the S&P 500 market index, calculating the returns over a five-year period. Researchers continue to study this theory, particularly using computer simulation of crowd behaviour, and the applicability of models to reproduce crash-like phenomena.
Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.
What Did the Stock Market Do After 911?
On October 24, many of the world's stock exchanges experienced the worst declines in their history, with drops of around 10% in most indices. In the US, the DJIA fell 3.6%, i.e. not as much as other markets. Instead, both the US dollar and Japanese yen soared against other major currencies, particularly the British pound and Canadian dollar, as world investors sought safe havens. Later that day, the deputy governor of the Bank of England, Charles Bean, suggested that "This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history."