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Nonlinear Dynamics and the Distribution of Daily Stock Index Returns

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  • Brorsen, B Wade
  • Yang, Seung-Ryong

Abstract

Three alternative models of daily stock index returns are considered: (1) a diffusion-jump process; (2) an extended generalized autoregressive conditional heteroskedasticity (GARCH) process; and (3) a combination of the GARCH and jump processes. Non-nested tests between the diffusion-jump process and a GARCH(1,1) process with t-distributed errors reject the diffusion-jump process, but do not always reject the GARCH process. Kolmogorov-Smirnov tests of fit, however, reject the GARCH(1,1)-t process for all cases. Nonlinear dependence is not removed for the value-weighted index and the S&P 500 stock index; therefore, deterministic chaos cannot be dismissed.

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Bibliographic Info

Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

Volume (Year): 17 (1994)
Issue (Month): 2 (Summer)
Pages: 187-203

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Handle: RePEc:bla:jfnres:v:17:y:1994:i:2:p:187-203

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Cited by:
  1. Khalaf, Lynda & Saphores, Jean-Daniel & Bilodeau, Jean-François, 2000. "Simulation-Based Exact Tests with Unidentified Nuisance Parameters under the Null Hypothesis : the Case of Jumps Tests in Model with Conditional Heteroskedasticity," Cahiers de recherche 0004, Université Laval - Département d'économique.
  2. Chenyang Feng & Stephen D. Smith, 1997. "Jump risk, time-varying risk premia, and technical trading profits," Working Paper 97-17, Federal Reserve Bank of Atlanta.
  3. Evzen Kocenda & Lubos Briatka, 2004. "Advancing the iid Test Based on Integration across the Correlation Integral: Ranges, Competition, and Power," Econometrics 0409001, EconWPA.
  4. Khalaf, Lynda & Saphores, Jean-Daniel & Bilodeau, Jean-Francois, 2003. "Simulation-based exact jump tests in models with conditional heteroskedasticity," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 531-553, December.
  5. Jean-Thomas Bernard & Lynda Khalaf & Maral Kichian & Sebastien McMahon, 2006. "Forecasting Commodity Prices: GARCH, Jumps, and Mean Reversion," Working Papers 06-14, Bank of Canada.
  6. Marisa Faggini, 2011. "Chaotic Time Series Analysis in Economics: Balance and Perspectives," Working papers 25, Former Department of Economics and Public Finance "G. Prato", University of Torino.
  7. Lin, Bing-Huei & Yeh, Shih-Kuo, 2000. "On the distribution and conditional heteroscedasticity in Taiwan stock prices," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 367-395, December.
  8. Drama, Bedi Guy Herve & Yao, Shen, 2010. "Management of Stock Price and it Effect on Economic Growth: Case study of West African Financial Markets," MPRA Paper 24907, University Library of Munich, Germany.

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