The more efficient we make financial markets, the more likely they are to crash when interest rates stay low.
March 25, 2026
Original Paper
Cubic Fragility in Financial Networks: A Regime-Dependent Crisis Prediction Framework
SSRN · 6194678
The Takeaway
Standard financial theory assumes that market efficiency always improves stability. This study reveals that this relationship reverses in low-interest-rate environments, where the same efficiency that usually protects markets actually scales up systemic risk and accelerates fragility.
From the abstract
Financial crises are frequently preceded by systematic early warning signals that contemporary risk frameworks fail to detect. This paper introduces Cubic Fragility-a regime-dependent nonlinear model wherein systemic risk scales with efficiency degradation through mechanisms that are fundamentally contingent on monetary policy conditions. By synthesizing stochastic calculus and crisis escape theory with empirical validation using Federal Reserve Economic Data (2014-2026), I derive regime-specifi