June 29, 2012 11:16 0218-348X 1250012

Fractals, Vol. 20, No. 2 (2012) 133–140

c World Scientific Publishing Company
DOI: 10.1142/S0218348X12500120

STUDY ON THE FRACTAL AND CHAOTIC

FEATURES OF THE SHANGHAI
COMPOSITE INDEX

FENGHUA WEN,∗ ZHONG LI,† CHAOHUA XIE∗

and DAVID SHAW‡,§
∗School of Economics and Management

Changsha University of Science and Technology

Hunan Province, 410114, P. R. China
†Institute for Financial Studies, Fudan University

Shanghai, 200433, P. R. China

‡Haskayne School of Business, Scurfield Hall

University of Calgary
2500 University Dr. NW
Calgary, Alberta, T2N 1N4, Canada
§ davidshow1@gmail.com

Received June 6, 2011

Accepted November 4, 2011
Published May 28, 2012

Abstract
The Hurst exponent derived by the R/S analysis method of Shanghai stock market’s logarith-
mic return series is about 0.6298. This shows that the Shanghai stock market exhibits fractal
features, and a long memory cycle of about one-and-a-half years. With the reconstruction of
phase space, the Shanghai Stock attractor dimension converges to 1.335, which means that the
Shanghai stock market has chaotic features, and constructing a dynamic system of the Shanghai
stock market needs at least two variables. The findings from the principal component analy-
sis support the conclusion of the existence of chaotic features of the Shanghai stock market.

§
Corresponding author.

133
June 29, 2012 11:16 0218-348X 1250012

134 F. Wen et al.

The fractal and chaotic features of the Shanghai stock market reveal the nonlinear properties
of the Chinese stock market, and the nonlinearity perspective will be more conducive to the
formulation of countermeasures for the development of the Chinese stock market.

Keywords: Fractals; Chaos; R/S Analysis Method; Reconstruction of Phase Space.

1. INTRODUCTION methodology. The fourth section is an empirical test

In the real world, nonlinear problems are not excep-
tional, but regular phenomena. Nonlinearity is the
nature of matter and its development. However,
conventional economics, under the influence of New-
tonian classic mechanics, assumes a linear relation-
ship between variables, and believes that variables
change proportionately and the law of additivity
holds for the parts and the whole. Nonlinearity is
the real source of the diversity, complexity and vari-
ability of the economic systems. The linear perspec-
tive helps us understand some of the properties of
the economic system, but at the same time leads us
astray in appreciating the nonlinearity of the eco-
nomic system.1,2
This paper summarizes some common research
methods for nonlinearity used by various schol-
ars in China and abroad, and revealed the fractal
and chaotic features of the Shanghai stock market
during 1994–2010 with empirical investigation of
the Hurst exponent, R/S analysis, the correlation
dimension method, the principal component analy-
sis. The second section of this paper is a literature
review. The third section is an introduction of the
and the fifth section is the conclusion.
2. LITERATURE REVIEW ON
NONLINEARITY STUDIES
2.1. Fractal Features
The concept of fractal appeared noticeably in
Mandelbrot’s problem of measuring the length of
coastlines. For this kind of problem, the theoretic
circumference approaches infinity with different
length rulers getting smaller. The irregular geomet-
ric shape, such as the coastline, looks the same
at all scales.3 In a sense, the analysis of the
time fractal of an event can better capture the
nature.3,4
The Hurst Exponent (H) is often used to mea-
sure the roughness of a time series. As H increases,
the curve for the time series gets smoother. As H
increases, the noise of the incremental series of the
original time series becomes smaller, and there are
more consecutive observations of the same sign,5 as
shown in Fig. 1.

The increments of the original time

The original time series when H =0.3 series when H=0.3(An enlarged part)
5
0.1
0
0
-5
-0.1
-10
200 400 600 800 1000 340 360 380 400 420 440
The increments of the original time
The original time series when H = 0.9 series when H=0.9(An enlarged part)
50
0.01

0 0

-0.01
-50
200 400 600 800 1000 80 100 120 140 160 180

Fig. 1 Hurst exponent and time series.

June 29, 2012 11:16 0218-348X 1250012
Fractal and Chaotic Features of the Shanghai Composite Index
There have been many attempts to study the
fractal features of the financial markets: Wang and
Wei believes that there exist multi-fractal features
in the price volatility of the Shanghai Composite
Index and the S&P 5006 ; Chen et al. used Rescaled
R/S analysis to analyze the fractal features of the
Shanghai stock market and the Shenzhen stock
market7 ; Huang also believes that there exist frac-
tal features in China’s stock market; Fan and Wei
employed R/S analysis to provide empirical evi-
dences for the fractal features of the Shanghai stock
market and the Shenzhen stock market8 ; Yoon and
Kang believes that there exist long-term memory
and non-periodic cycle for the Korean stock index9 ;
Ashok Razdan thinks that the BSE index is frac-
tal10 ; Barkoulas and others pointed out that there
is striking long-term memory in some small emerg-
ing stock markets.11
2.2. Literature Review on Research
on Chaos
Chaos refers to a kind of initial values depen-
dent recurrent non-periodic motion generated by
a deterministic system, or the seemingly random
irregular motion of a deterministic system. Li and
Yorke (1975)12 proposed this concept in their paper,
mathematically defined it and summarized three
properties: the dependence on initial value, non-
periodicity, and boundedness. In applications, the
determination of a chaotic system is conducted in
terms of the value of an attractor. If the attractor of
the phase space of the system has fractional dimen-
sion character (correlation dimension), and if the
system is sensitive to the initial state, the attractor
can be determined as a strange (chaotic) attrac-
tor.13 Crutchfield proposed the reconstruction of
phase space to study the features of the chaotic
attractor, and Takens laid a reliable mathematic
foundation for the study.14 Grassberger and Procac-
cia reviewed the various algorithms for the attractor
of the chaotic system.15 Peters studied the chaotic
features of the S&P 500, and derived the correlation
dimension, 2.33, which implied that the stock mar-
ket has the properties of nonlinearity.16 Lim and
Liew investigated the Asian stock market indices,
and believed that the return series have striking
nonlinearity.17 Huang et al. believes that there exist
fractal and chaotic features in the Shanghai and
Shenzhen stock markets.18 Fan and Wei thinks that
there is chaotic features in Chinese stock markets.14
Li et al. believes that Chinese stock markets exhibit
135
chaotic features.19 Gao et al. pointed out that Chi-
nese securities market operates in a chaotic state,
with the empirical evidence for the Lyapunov expo-
nent and the fractional dimension of the attractor.20
Fractal and Chaos are the inherent properties of
the nonlinear dynamical system; a universal phe-
nomenon existed in nonlinear system. The Frac-
tal theory explores the nature and the inherent
relationship in complex matters in the real world,
and the Chaos theory is a science concerning the
process (not the state) and its evolution (not the
existence), which is applied to capture the com-
plexity of a system. The Fractal and the Chaos
are the important contents of the nonlinear science,
and both are closely related yet independent the-
oretic systems. The concept of Fractal originates
from the space fractal, which provides new concep-
tual and methodological framework completely dif-
ferent from the conventional Geometry. The strange
(chaotic) attractor of a chaotic system has fractal
features and can be characterized by the Fractal
theory. By representing the fractal dimension of the
strange attractor, we could know how many vari-
ables are needed to construct a dynamical model
for the system.
3. INVESTIGATION OF THE
CHINESE STOCK MARKETS’
FRACTAL AND CHAOTIC
FEATURES
3.1. Data Source and Treatment
Our data are taken from the Shanghai Component
Index, the closing prices during Dec. 19, 1990 to
July 1, 2010, including 4788 closing price data which
means 4786 log return data. The data treatment is:
assuming the Shanghai Composite Index price is Pt
at time t, and the time duration is one day, so the
daily log return is. ln Pt − ln Pt−1 . The log return is
more suitable for R/S analysis than the percentage
return rate, as the range for the R/S analysis is
the cumulative deviation from the mean: the sum
of the log return is just the cumulative return, but
the percentage change hasn’t this characteristic.
3.2. Tests of the Fractal Features
Conventional statistics emphasizes on a great num-
ber of incremental changes, thus often averaging out
the differences in the process of the change in a
matter, and neglecting the phenomenon of the sin-
gular points of the system. But actually there exist
June 29, 2012 11:16 0218-348X 1250012

136 F. Wen et al.

some singular points in a sustainable system, which
appear as local broken shock and fluctuations. Only
when the incremental changes are treated in terms
of the Fractal Statistics, can the nonlinear relation-
ship between the local change and the global change
be comprehensively and scientifically explained.21
There are several computing methods for the
fractal dimension of the time series, and the R/S
analysis is the most widely used one. In order to
study the statistical features of the time series,
Hust22 proposed the R/S analysis, which was later
introduced by Mandelbrot,23 and May24 into the
fractal analysis. Peters,16 and Qian and Rasheed25
summarized and applied the computing methods for
the Hurst Exponent. The idea of the R/S analysis
for the testing for the fractal features is quite differ-
ent from the conventional statistical approach, with
the former abandoning estimation and the distribu-
tion assumption. For details of the R/S analysis,
please refer to Huang,4 and Fan and Wei.14
According to the R/S analysis, we started treat-
ing the data by setting n = 10. The return series
can be divided into 478 parts and every part is
10-day separate increment data, and then the 10-
day ranges can be calculated. We used the 10-day
standard deviation to rescale each of the ranges
and got 478 separate R/S observations. Averaging
the 478 R/S observations, we got the correspond-
ing R/S estimate for n = 10. We repeated the
above procedure by setting n = 10, 11, 12, . . . , 2212,
the corresponding scatter plot for 2203 groups of
log(n) − log(R/S). It can be seen from Fig. 2, that
there is an obvious turning point first appeared at
(2.551, 1.43) in the curve. After this point, log(n) −
log(R/S) does not hold the linear relationship. The
theoretic analysis indicates that this point is the
corresponding mean cycle period corresponding for
the system, with the cycle period being 102.551 ≈
355. In order to accurately investigate the point,
we can study the scatter plot Fig. 3 for the statis-
tic: Vn = (R/S)
√ n . In Fig. 3, the first turning point
n
is (2.55, 1.657), then the corresponding period is
102.55 ≈ 355, that is, the mean cycle period for
the Shanghai Stock Market is 355 trading days.
That cycle period implies that, on average, the stock

2
1.8

1.6 X: 2.551
Y: 1.43
1.4
log(R/S)

1.2

0.8

0.6

0.4
1 1.5 2 2.5 3 3.5
log(n)

Fig. 2 R/S analysis diagram for the Shanghai composite index daily return series.

2.5
X: 2.55
2 Y: 1.657

1.5
V

0.5

-0.5

-1
1 1.5 2 2.5 3 3.5
log(n)

Fig. 3 The V-statistic diagram for the R/S analysis for the Shanghai composite index daily return series.
June 29, 2012 11:16 0218-348X 1250012
Fractal and Chaotic Features of the Shanghai Composite Index
market will lose the memory of the initial condition
after 355 trading days, or, the effect of an event will
last on the system for 355 trading days on average.
Then we regressed on the 355 data points with
LSM, and derived the slope of the scatter plot,
0.6298, that is to say, the Hurst Exponent estimate
H = 0.6298. The fractal dimension for the log return
series of the Shanghai Composite Index D = 2−H =
1.37. The Correlation Degree is the measurement of
the effect of an observation on the ensuing obser-
vations of a time series. In our study, the correla-
tion Degree C = 22H−1 − 1 is 0.1971. The fractal
dimension 1.37 and the Correlation Degree 0.1971
for the Shanghai stock market return series indicate
that the daily return series of the Shanghai Com-
posite Index is a persistent series, the observations
are positively correlated, and the return series curve
is smoother than a random walk. These properties
also show that the price rise or fall continue its trend
for some time, thus exhibiting volatility clustering.
3.3. Tests for Chaotic Features
3.3.1. Correlation dimension
There are five basic determination methods for
chaotic time series commonly used at home and
abroad: power wave spectral method, the Poincaré
section, the Lyapunov Exponent, the principal com-
ponent analysis, and the correlation dimension.
Due to computational complexity of the first three
methods, we mainly adopt the last two methods fre-
quently used in the previous literature. After sum-
marizing concrete steps of the correlation dimension
of times series put forward by literature, we test for
the chaotic features of China’s stock market. We
employ the principal component analysis finally to
function as a useful proof.
(1) Detrend the Data As for non-linear dynam-
ical system, it is not appropriate to analyze the
original return time series. According to the fol-
lowing formula, we detrend the price time series.
St = ln(Pt ) − ln(CPIt ), where, St is the detrended
log price series; Pt is the original price series, namely
the original series of Shanghai Composite Index; t
refers to observation time. The value of CPI is the
continuous Consumer Price Index in China with
the year 1990 as its base period. Failing to get the
specific values of CPI on a daily basis, we use the
method of interpolation to estimate CPI value.
(2) Phase Space Reconstruction Phase space
reconstruction theory holds that the evolution of
137
any variable of the system is decided by its inter-
acting variables, so information of relevant vari-
ables is concealed in the development process of
any variable. In this way, we can extract and recon-
struct the original law of the system from a batch of
time series of a certain variable, which is a trajec-
tory of a high dimensional phase space. When the
number of the delay coordinate m (which is also
the dimension of the reconstructed phase space)
is equal to or greater than 2d + 1 (d refers to the
dimension of original dynamic system), a phase
space equivalent to the original system can be con-
structed through an embedding method, in which
the original dynamic system can be restored and
nature of the attractor of the original system can
be studied.26 Ruelle27 proposed the use the time
sequence {Xi } and its successive delays motion
[Xi , Xi+τ , . . . , Xi+(m−1)τ ] as coordinates of a new
vector time series Yi = [Xi , Xi+τ , . . . , Xi+(m−1)τ ],
where τ is referred to as the delay time, and for a
digitized time series is a multiple of the sampling
interval used, while m is termed the embedding
dimension. Both τ and m reconstruction param-
eters must be determined from the original data.
The embedding theorem tells us that the dynamic
character of the new phase space is similar to the
original one. In this way, we could study dynamic
character of the original time series by the new
phase space.26
Wolf 28 pointed out that time delay should meet
the following requirement — m×τ = Q (in which m
is the embedding dimension, τ is the time delay, and
Q is average orbital periods). The time delay is the
proportion of the periodic orbit distributed to each
dimension, which maintain the invariability of the
periodic orbit in a high dimensional phase space.
The periodic orbit refers to the time represented
by the point where the observations are indepen-
dent from each other in the R/S analysis method. In
the previous analysis we obtained the average cycle
period of Shanghai stock market to be around 355
trading days, and then we can calculate time delay
with different embedding dimensions. Analyze the
obtained phase space dimension ranging from 4 to
16. We learn that when m is 4, t is 88, and so in
this way we can get different time delays of different
dimensions.
(3) Correlation Integral of the Reconstruc-
tion Phase Space Grassberger and Procaccia15
proposed using correlation integral to approxi-
mate the fractal dimension. The correlation integral
June 29, 2012 11:16 0218-348X 1250012

138 F. Wen et al.

Cm (R) is the probability of the distance between value of approximately 1.335. That implies that at
each pair of these points in an attractor is under R least two variables are needed to characterize the
(the distance between every two points in the space, dynamical features of the Shanghai stock market as
which can has different values; usually it is calcu- there is a chaotic feature in the time series of the
lated from the shortest to the longest distance). We Shanghai Composite Index.
can use the calculating methods summarized in Wei
to compute the fractal dimension of all the phase 3.3.2. Result of principal
spaces.14 The longer the time series for the calcula-
component analysis
tion of the fractal dimension, or the more the points
in the phase space, the more storage space it needs, According to the principal component analysis
which the performance of many ordinary comput- method introduced by Gong and Xu.29 For the
ers cannot satisfy. So we only set the time horizon time series {Xn }, n = 1, 2, . . . , N , when time dis-
as from Jan. 5, 1998 to June 30, 2010, with 3018 tance is τ and dimension is d, we could get a
pieces of data. First we calculate the Cm (R) for dif- new matrix Xl×d (l = N − d + 1); the relationship
ferent embedding dimension m, and then plot these between τ and d like what has stated in Phase Space
points in the coordinate of log(R) and log(Cm (R)), Reconstruction,
as shown in Fig. 4 of the correlation diagram for  
x1 x2 L xd
the Shanghai stock market. For each embedding  
dimension, we calculate the slope for the corre- 1 
x2 x3 L xd+1 
.
Xl×d = 1  
sponding curve and thus get the estimate of the l 2 M M O M 
corresponding fractal dimension for each embedding
xl xl+1 L xN
dimension. Table 1 lists the number of the fractal
dimension derived with LSM using the correlation Then we need to calculate the covariance matrix-A
integral. It can be seen from the data in Fig. 4 and of X to get A eigenvector-λ
d i , i = 1, 2, . . . , d. Finally,
Table 1, as the embedding dimension m increases, we get ri = ln λi − ln i=1 λi , and insert all i into
the curves for the correlation integral get increas- the X-axis and ri into the Y-axis, we get the spectral
ingly closer. Also, the number of dimensions in the graph for the principal component analysis. Theo-
correlation integral graph fluctuates when m = 15, retically, the spectral graph of noise is a horizontal
that is to the effect that the fractal dimension of the line, but the spectral graph of a chaotic signal has
phase space converges continuously, with the final a negative slope. We can get the 4 to 15 trajectory

-1 4 5 6 7 8 9 10 11 12 13 14 15 16

-2
log(Cm(R))

-3

-4

-5

-6

-7
-3 -2.5 -2 -1.5 -1 -0.5 0 0.5
log(R)

Fig. 4 The correlation integral graph for the Shanghai stock market daily log return series.

Table 1 The Regression Results for the Correlation Dimension Slope for the Shanghai Stock
Market.

m 4 6 8 9 10 11 12 13 14 15 16

Dm 1.2914 1.3125 1.3240 1.3253 1.3301 1.3315 1.3329 1.3341 1.3361 1.3367 1.3352
June 29, 2012 11:16 0218-348X 1250012
0
-0.5
-1
-1.5
-2
ri
-2.5
-3
-3.5
-4
-4.50
Fig. 5 Spectral graph for the principal component for the daily log return.
matrix (which means d is from 4 to 15) for the cor-
responding return series; then solve for the covari-
ance matrix; finally we get the spectral graph for the
principal component for the daily log return of the
Shanghai stock market (see Fig. 5). From lower left
to upper right, the figures show that the spectral
graph for the principal component for trajectory
matrix with the dimension ranging from 4 to 15 suc-
cessively. Their slope is −1.1438, −0.8313, −0.6429,
−0.5191, −0.4327, −0.3693, −0.3211, −0.2834,
−0.2532, −0.2285, −0.2080, −0.1907 respectively. It
can be clearly seen that those dots suggest a straight
line skewing to the bottom right. The characteristic
of the graph (all these lines have a negative
slope) indicates the existence of chaotic features
of the log return series of the Shanghai stock
market.
4. SUMMARY
(1) Based on that Hurst exponent is 0.6298 and
fractal dimension is 1.335, we believe that the
chaotic features exist in the Shanghai stock
market. Considering these results, the stock
market in China does not follow the Gaussian
distributions but fractal distributions, and so
the variance cannot be used as a benchmark
of market risk. Different from assumed con-
ditions of EMH, the stock market in China
whose Hurst exponent is 0.6298 does not show
the feature of random walk, nor it is an inde-
pendent process. Instead, it runs in a mutu-
ally dependent manner, because its correlation
dimension is not 0. H is greater than 0.5, which
also reveals that an incident of the Shanghai
stock market may exert lasting impact. Con-
tinuous ups and downs exist in the Shanghai
Fractal and Chaotic Features of the Shanghai Composite Index 139
5 10 15
i
stock market, reflecting the fluctuant cluster-
ing. Maybe because the information presents
itself in a nonlinear way, and people’s response
to information also is nonlinear, the fluctua-
tion of Chinese stock market index exhibits
in a nonlinear way; all the above-mentioned
factors produce an effect on the stock index
through market transaction, and eventually,
the stock index series present a nonlinear
character.
(2) Generally speaking, there are over 240 trading
days every year, and the average cycle period
of Shanghai stock market is around 355 trad-
ing days, which is about one and a half years.
The cycle is not for price; instead, it shows the
average memory span of the system to initial
conditions, that is to say, the system will no
longer depend on its initial conditions after one
and a half years, or an exogenous variable will
have no effects on the system after about a year
and a half.
(3) As embedding dimension increases, the esti-
mated fractal dimension converges to 1.335,
which means that the Shanghai stock mar-
ket is neither of point equilibrium nor line
equilibrium as in the conventional economics.
Instead, a strange attractor exists. Since the
system has chaotic features, establishing the
dynamic model of the Shanghai stock market
needs at least two independent variables. How-
ever, due to the complexity of stock market,
the selection of those two variables is not easily
recognizable. From the spectral graph for the
principal component of the stock return series,
different verification methods come to the same
conclusion: there are chaotic characteristics in
Shanghai stock market.
June 29, 2012 11:16 0218-348X 1250012
140 F. Wen et al.
ACKNOWLEDGMENTS
This work is financially supported by the National
Science Foundation of China (71171024), the Natu-
ral Science Foundation of China (70971013), Hunan
Natural Science Foundation (09JJ1010) and the
Key Research Institute of Philosophies and Social
Sciences in Hunan Universities.
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