Pathways to randomness in the economy: Emergent nonlinearity and chaos in economics and finance
Abstract
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 (IIDLinearity 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 HDLinea r or MDSLinear earnings processes into non MDSLinear equilibrium returns processes.
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