Pathways to Randomness in the Economy: Emergent Nonlinearity and Chaos in Economics and Finance

William Brock

Working Papers from Santa Fe Institute

Abstract: The 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 orgainizing concepts not only for discussion of nonlinearity testing in time series econometrics 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: 1993-02
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Journal Article: Pathways to randomness in the economy: Emergent nonlinearity and chaos in economics and finance (1993)
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Persistent link: https://EconPapers.repec.org/RePEc:wop:safiwp:93-02-006

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