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Is There Chaos in the World Economy? A Nonparametric Test Using Consistent Standard Errors

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  • Oliver Linton

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  • Mototsugu Shintani

Abstract

A positive Lyapunov exponent is one pratical definition of chaos. We develop a formal test for chaos in a noisy system based on the sign of the Lyapunov exponent. The test utilizes nonparametric regression techniques including local quadratic regression and neural networks. When our procedures are applied to international real output series, the Lyapunov exponent estimates are negative and the positivity hypothesis of the expononent is significantly rejected in many cases. One possible interpretation of this result is that the traditional exogenous models are better able to explain business cycle fluctuations than is the chaotic endogenous approach. However, our results are subject to a number of caveats, in particular our results could have been influenced by small sample bias, high noise level, incorrect filtering, and long memory of the data.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp383.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp383.

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Date of creation: Jun 2001
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Handle: RePEc:fmg:fmgdps:dp383

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Web page: http://www.lse.ac.uk/fmg/

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