Pathways to randomness in the economy: Emergent nonlinearity and chaos in economics and finance
DOI:
https://doi.org/10.24201/ee.v8i1.294Keywords:
chaos theory, theory of interactive particle systems, returnsAbstract
This paper: (1) gives a general argument why research on nonlinear science in general and chaos in particular is important in economics and finance. (2) Puts forth two definitions of stochastic nonlinearity (IID-Linearity and MDS - Linearity) for nonlinear time series analysis and argues for their usefulness as organizing concepts not only for discussion of nonlinearity testing but also for building a new class of structural asset pricing models. (3) Shows how to use ideas from interacting particle systems theory to build structural asset pricing models that turn HD-Linea r or MDS-Linear earnings processes into non MDS-Linear equilibrium returns processes.
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