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The Search for Chaos and Nonlinearities in Swedish Stock Index Returns

Author

Listed:
  • Amilon, Henrik

    () (Department of Economics, Lund University)

  • Byström, Hans

    () (Department of Economics, Lund University)

Abstract

Numerous empirical studies have shown evidence of nonlinearities in financial time series, which can be of both a deterministic and a stochastic nature. Chaos is an example of the former, and heteroscedasticity in the conditional variance an example of the latter. We apply a test, the BDS test, to Swedish Stock Index returns and detect large deviations from the IID-hypothesis. There is no evidence of chaos, and most of the nonlinearities are due to conditionally heteroscedastic error terms. We look at monthly, daily, and 15-minute return series, and find no sensitivity in the results to choice of sampling frequency. Different GARCH models often seem to explain the nonlinearities detected by the BDS test, which is particularly the case for GARCH models with t-distributed errors fitted to monthly and daily returns.

Suggested Citation

  • Amilon, Henrik & Byström, Hans, 1998. "The Search for Chaos and Nonlinearities in Swedish Stock Index Returns," Working Papers 1998:6, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:1998_006
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    References listed on IDEAS

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    7. Paula L. Varson & Paul Doran, 1995. "The search for evidence of chaos in FTSE‐100 daily returns," European Financial Management, European Financial Management Association, vol. 1(2), pages 201-210, July.
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    More about this item

    Keywords

    BDS test; neural networks; heteroscedasticity; deterministic systems;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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