Neglected chaos in international stock markets:Bayesian analysis of the joint return-volatility dynamical system

Tsionas, Mike and Michaelides, Panayotis G. (2017) Neglected chaos in international stock markets:Bayesian analysis of the joint return-volatility dynamical system. Physica A: Statistical Mechanics and its Applications, 482. pp. 95-107. ISSN 0378-4371

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Abstract

We use a novel Bayesian inference procedure for the Lyapunov exponent in the dynamical system of returns and their unobserved volatility. In the dynamical system, computation of largest Lyapunov exponent by traditional methods is impossible as the stochastic nature has to be taken explicitly into account due to unobserved volatility. We apply the new techniques to daily stock return data for a group of six countries, namely USA, UK, Switzerland, Netherlands, Germany and France, from 2003 to 2014 by means of Sequential Monte Carlo for Bayesian inference. The evidence points to the direction that there is indeed noisy chaos both before and after the recent financial crisis. However, when a much simpler model is examined where the interaction between returns and volatility is not taken into consideration jointly, the hypothesis of chaotic dynamics does not receive much support by the data (“neglected chaos”).

Item Type:
Journal Article
Journal or Publication Title:
Physica A: Statistical Mechanics and its Applications
Additional Information:
This is the author’s version of a work that was accepted for publication in Physica A. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Physica A, 482, 2017 DOI: 10.1016/j.physa.2017.04.060
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/3100/3104
Subjects:
ID Code:
85975
Deposited By:
Deposited On:
24 Apr 2017 09:04
Refereed?:
Yes
Published?:
Published
Last Modified:
27 Sep 2020 03:52