Surrogate Data Analysis and Stochastic Chaotic Modelling: Application to Stock Exchange Returns Series

We investigate for evidence of complex-deterministic dynamics in financial returns time series. By combining the Surrogate Data Analysis inferential framework with the MG-GARCH (Kyrtsou and Terraza, 2003) modelling approach, we examine whether the sequences are characterized by aperiodic and nonlinear deterministic cycles or pure randomness. Our results support the hypothesis of complex nonlinear and non-stochastic dynamics in the data generating processes. According to our approach, markets can be assumed to be highly complex, high-dimensional, open and dissipative dynamical systems that need feedback as well as other kinds of inputs in order to operate. These inputs may come in the guise of noise or news. The inputs may also control the evolution of the system dynamics and the knowledge of their nature may allow us to forecast the future states of the market with greater accuracy. To this extent the MG-GARCH model provides a valuable insight on how a feedback mechanism can operate within the structure of stock returns processes and explain stylized facts.MG-GARCH, Surrogate Data Analysis, Chaos, Complexity

A Nonlinear New Approach to Investigating Crisis: A Case from Malaysia

In this paper, we have investigated the effects of Asia 97 crisis on Malaysian stock exchange market by using a nonlinear approach which gives a detailed analysis with respect to linear counterparts. Specifically, we are using generalized impulse response function (GIRF) in order to see the effects of crisis on stock indices. In order to employ GIRF analysis, we need further investigation on potential nonlinearities in conditional mean and variance equation for Malaysia stock market. Specifically, we use STAR-STGARCH family models for modeling daily returns of the Investable and Non-Investable Malaysia stock indices, covering the period 1995.06.30-2003.09.05. The analysis of this paper shows that individual markets of Malaysia have strongly been affected from the Asia 97 crisis. In addition, the Asia 97 crisis has increased the variability of the Malaysia stock market and affected foreign investors more than the domestic investors.STAR-STGARCH, Generalized Impulse Response Function. 1997 Asia Crisis, stock markets

Evolutionary models’ comparative analysis. Methodology proposition based on selected neo-schumpeterian models of industrial dynamics

A methodology of comparative analysis of evolutionary models is proposed. The main aim of this proposition is to identify to what extend different models can be called âevolutionary onesâ. Each model is analysed by searching for answers to following questions:  Is the model dynamical one?  Is it focused on far-from-equilibrium analysis?  What are a unit of evolution and a unit of selection?  Is diversity and heterogeneity of economic agents and their behaviour observed?  Is search for innovation based on a concept of hereditary information (knowledge)?  What kinds of innovation does the model describe?  Does selection process lead to diversified rate of growth and spontaneity of development?  How economic agents set prices?  What kind of products are described by the model?  Are decision making procedures and investment procedures present in the model? Outline of selected schumpeterian models is accompanied by identification of crucial evolutionary characteristics of each model and a short indication of phenomena explained by that model.Evolutionary economics, neo-schumpeterian models, simulation

The CAPM strikes back? An equilibrium model with disasters

Embedding disasters into a general equilibrium model with heterogeneous firms induces strong nonlinearity in the pricing kernel, helping explain the empirical failure of the (consumption) CAPM. Our single-factor model reproduces the failure of the CAPM in explaining the value premium in finite samples without disasters and its relative success in samples with disasters. Due to beta measurement errors, the estimated beta-return relation is flat, consistent with the beta “anomaly,” even though the true beta-return relation is strongly positive. Finally, the consumption CAPM fails in simulations, even though a nonlinear model with the true pricing kernel holds exactly by construction

The efficient market hypothesis re-visited: new evidence from 100 US firms

In this paper, we test the efficient market hypothesis for 100 US firms listed on the New York Stock Exchange. To test the unit root null hypothesis, we develop a generalized autoregressive heteroskedasticity (GARCH) model that not only caters for the GARCH errors but also allows for two endogenous structural breaks in the data series. We study the size and power properties of the proposed GARCH structural break unit root test and find that it statistically performs well in finite samples. We find that only 22% of firms have a stationary stock price series.Efficient market hypothesis, GARCH, unit root, structural break, stock price