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Pathways to randomness in the economy: Emergent nonlinearity and chaos in economics and finance

William Brock

Estudios Económicos, 1993, vol. 8, issue 1, 3-55

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 (IID-Linearity and MDS-Linearity) for nonlinear time series analysis and argues for their usefulness as organizing concepts not only for discussion of nonlinearity testinf 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 IID-Linear or MDS-Linear earnings processes into non MDS-Linear equilibrium returns processes.

Date: 1993
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