Global Stock Market, Knife-Edge Stability and the Crisis

Gagari Chakrabarti and Chitrakalpa Sen
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Gagari Chakrabarti: Presidency University
Chitrakalpa Sen: G D Goenka World Institute

Chapter Chapter 4 in Anatomy of Global Stock Market Crashes, 2012, pp 49-62 from Springer

Abstract: Abstract This chapter explores whether the global markets are intrinsically unstable following the line of a growing body of the literature and inquires the possible nonlinear, particularly chaotic nature of these markets. The study finds all the markets to be deterministic. While over the first cycle nineteen markets were chaotic, the number increases to twenty four during the second one. Thus stock markets are inherently unstable; or are, at best, stable on knife-edge. Cycles and crashes are manifestations of this inherent instability: norms rather than aberrations. There is no determinate equilibrium and no external shock will be required to gear financial crisis at regular intervals which, in an integrated financial world, will reverberate across the globe in no time. The findings have significant theoretical and policy implications. The relevant equations of motion underlying the nonlinear global stock market return, no doubt can be determined, but it would be nearly impossible to forecast beyond a short time frame. Policy prescriptions, based on the presumption of linearity are likely to be ineffective when applied on a system which is actually nonlinear. At the theoretical level, a chaotic stock market puts efficient market hypothesis on trial and requires reframing of traditional asset pricing models.

Keywords: Non-linearity; Chaos; Determinism; Knife-edge stability; False nearest neighborhood; Mutual information criterion; Maximum Lyapunov exponent (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:spr:spbchp:978-81-322-0463-3_4

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DOI: 10.1007/978-81-322-0463-3_4

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