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A Potential-Field Approach to Financial Time Series Modelling

Author

Listed:
  • S. Borovkova
  • H. Dehling
  • J. Renkema
  • H. Tulleken

Abstract

We present a new approach to the problem of time series modelling that captures the invariant distribution of time series data within the model. This is particularly relevant in modelling economic and financial time series, such as oil prices, that exhibit clustering around a few preferred market modes. We propose a potential function approach which determines the function that governs the underlying time series process. This approach extends naturally to modelling multivariate time series. We show how to estimate the potential function for dimensions one and higher and use it to model statistically the evolution of the time series. An illustration of the procedure shows that testing the resulting model against historical data of oil prices captures the essential price behavior remarkably well. The model allows the generation of copies of the observed time series as well as providing better predictions by reducing uncertainty about the future behavior of the time series. Copyright Kluwer Academic Publishers 2003

Suggested Citation

  • S. Borovkova & H. Dehling & J. Renkema & H. Tulleken, 2003. "A Potential-Field Approach to Financial Time Series Modelling," Computational Economics, Springer;Society for Computational Economics, vol. 22(2), pages 139-161, October.
    • Handle: RePEc:kap:compec:v:22:y:2003:i:2:p:139-161
    DOI: 10.1023/A:1026181713294
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    References listed on IDEAS

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    1. Brock,W.A. & Hommes,C.H., 2001. "Evolutionary dynamics in financial markets with many trader types," Working papers 7, Wisconsin Madison - Social Systems.
    2. C. H. Hommes, 2001. "Financial markets as nonlinear adaptive evolutionary systems," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 149-167.
    3. Brock, W.A. & Hommes, C.H., 1997. "Models of Compelxity in Economics and Finance," Working papers 9706, Wisconsin Madison - Social Systems.
    4. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
    5. Gaunersdorfer, A. & Hommes, C.H. & Wagener, F.O.O., 2000. "Bifurcation Routes to Volatility Clustering," CeNDEF Working Papers 00-04, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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