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Nonlinear Dynamics and Recurrence Plots for Detecting Financial Crisis

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  • Peter Martey Addo

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, Università Ca' Foscari of Venice - Department of Economics, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Monica Billio

    ()
    (Università Ca' Foscari of Venice - Department of Economics)

  • Dominique Guegan

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Abstract

Identification of financial bubbles and crisis is a topic of major concern since it is important to prevent collapses that can severely impact nations and economies. Our analysis deals with the use of the recently proposed "delay vector variance" (DVV) method, which examines local predictability of a signal in the phase space to detect the presence of determinism and nonlinearity in a time series. Optimal embedding parameters used in the DVV analysis are obtained via a differential entropy based method using wavelet-based surrogates. We exploit the concept of recurrence plots to study the stock market to locate hidden patterns, non-stationarity, and to examine the nature of these plots in events of financial crisis. In particular, the recurrence plots are employed to detect and characterize financial cycles. A comprehensive analysis of the feasibility of this approach is provided. We show that our methodology is useful in the diagnosis and detection of financial bubbles, which have significantly impacted economic upheavals in the past few decades.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00803450.

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Date of creation: Feb 2013
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Handle: RePEc:hal:cesptp:halshs-00803450

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Keywords: Nonlinearity analysis; surrogates; Delay vector variance (DVV) method; wavelets; financial bubbles; embedding parameters; recurrence plots;

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  1. repec:hal:journl:halshs-00694420 is not listed on IDEAS
  2. Peter Martey Addo & Monica Billio & Dominique Guegan, 2013. "Understanding Exchange Rates Dynamics," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00803447, HAL.
  3. Peter Martey Addo & Monica Billio & Dominique Guegan, 2012. "Alternative Methodology for Turning-Point Detection in Business Cycle: A Wavelet Approach," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 12023, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. Aizenman, Joshua & Noy, Ilan, 2012. "Overview of the special issue on international finance in the aftermath of the 2008 global crisis," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 23(3), pages 265-268.
  5. Belaire-Franch, Jorge, 2004. "Testing for non-linearity in an artificial financial market: a recurrence quantification approach," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 54(4), pages 483-494, August.
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Cited by:
  1. Chia-Lin Chang & David Allen & Michael McAleer, 2013. "Recent Developments in Financial Economics and Econometrics: An Overview," Tinbergen Institute Discussion Papers 13-021/III, Tinbergen Institute.
  2. repec:dgr:uvatin:2013021 is not listed on IDEAS
  3. Peter Martey Addo & Monica Billio & Dominique Guegan, 2012. "Studies in Nonlinear Dynamics and Wavelets for Business Cycle Analysis," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 12023r, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Nov 2013.
  4. Peter Martey Addo & Monica Billio & Dominique Guegan, 2013. "Turning point chronology for the Euro-Zone: A Distance Plot Approach," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 13025, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.

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