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Chaos and nonlinear dynamics: application to financial markets

Article Abstract:

After the stock market crash of October 19, 1987, interest in nonlinear dynamics, especially deterministic chaotic dynamics, has increased in both the financial press and the academic literature. This has come about because the frequency of large moves in stock markets is greater than would be expected under a normal distribution. There are a number of possible explanations. A popular one is that the stock market is governed by chaotic dynamics. What exactly is chaos and is it related to nonlinear dynamics? How does one detect chaos? Is there chaos in financial markets? Are there other explanations of the movements of financial prices other than chaos? The purpose of these paper is to explore this issues. (Reprinted by permission of the publisher.)

Chaos theory, Chaotic systems, Nonlinear theories

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Why does stock market volatility change over time?

Article Abstract:

This paper analyzes the relation of stock volatility with real and nominal macroeconomic volatility, economic activity, financial leverage, and stock trading activity using monthly data from 1857 to 1987. An important fact, previously noted by Officer (1973), is that stock return variability was unusually high during the 1929-1939 Great Depression. While aggregate leverage is significantly correlated with volatility, it explains a relatively small part of the movements in stock volatility. The amplitude of the fluctuations in aggregate stock volatility is difficult to explain using simple models of stock valuation, especially during the Great Depression. (Reprinted by permission of the publisher.)

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