Extreme risk clustering in long-memory financial series

Daniel R. Bergmann and Mauri A. Oliveira

Chaos, Solitons & Fractals, 2026, vol. 202, issue P1

Abstract: Financial markets exhibit long-range dependence and extreme event clustering that emerge from a critical phase transition governing the temporal organization of risk. We establish that the interaction between memory persistence (Hurst exponent H) and tail heaviness (tail index α) creates distinct dynamical regimes separated by a critical boundary at α∗=1/d, where d is the fractional differencing parameter. Using 4.7 million high-frequency S&P 500 futures observations (2006–2024), we demonstrate that markets universally operate in a supercritical regime where extreme events cluster according to power-law decay λ(k)∼k(d−1)α. During the 2008 crisis (Hˆ=0.824, αˆ=2.41) and COVID-19 (Hˆ=0.812, αˆ=2.53), markets moved toward the critical boundary, intensifying the self-organized clustering of extremes. This nonlinear feedback mechanism creates a fractal temporal structure where turbulence simultaneously increases memory and tail heaviness, pushing the system deeper into supercriticality. The power-law exponent ranges from −2.42 to −1.63, quantifying the persistence of risk fractals across multiple timescales. Standard Value-at-Risk models underestimate 20-day risk by 46%–63% due to their failure to account for this power-law aggregation. We develop a scale-invariant risk framework that properly captures fractal clustering, with superior backtesting performance. The universal supercritical behavior and systematic movement toward criticality during crises reveal financial markets as self-organized critical systems, providing new tools for understanding crashes as phase transitions and managing systemic risk in complex financial systems.

Keywords: Phase transitions; Temporal tail dependence; Long-range dependence; Regular variation; Extreme value theory; Fractional integration; Risk management (search for similar items in EconPapers)
JEL-codes: C22 C32 C58 G32 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:202:y:2026:i:p1:s0960077925015267

DOI: 10.1016/j.chaos.2025.117513

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