Economists conventionally attribute observed volatility in economic time series data to exogenous random shocks that agitate otherwise stable real-world markets; and consequently, model volatility with a variety of linear-stochastic and probabilistic methods. However, some economists have recognized another possible explanation for volatility: Markets may be intrinsically unstable, and we might be able to model attending volatility parsimoniously with low-dimensional, nonlinear, deterministic dynamic models without resorting to stochastic inputs. Whether observed volatility is generated by inherently stable or unstable markets has serious policy implications. Will laissez-faire policies suffice to dampen volatility because markets are self-correcting, or are interventionist policies required? This chapter introduces nonlinear time series analysis (NLTS)—a collection of methods developed in mathematical physics to diagnose the source of real-world volatility from observed time series data. Depending on data quality, economists can potentially use NLTS to reconstruct phase-space market dynamics and extract equations of motion from a single price series.
Reconstructing deterministic economic dynamics from volatile time series data
CANAVARI, MAURIZIO
2019
Abstract
Economists conventionally attribute observed volatility in economic time series data to exogenous random shocks that agitate otherwise stable real-world markets; and consequently, model volatility with a variety of linear-stochastic and probabilistic methods. However, some economists have recognized another possible explanation for volatility: Markets may be intrinsically unstable, and we might be able to model attending volatility parsimoniously with low-dimensional, nonlinear, deterministic dynamic models without resorting to stochastic inputs. Whether observed volatility is generated by inherently stable or unstable markets has serious policy implications. Will laissez-faire policies suffice to dampen volatility because markets are self-correcting, or are interventionist policies required? This chapter introduces nonlinear time series analysis (NLTS)—a collection of methods developed in mathematical physics to diagnose the source of real-world volatility from observed time series data. Depending on data quality, economists can potentially use NLTS to reconstruct phase-space market dynamics and extract equations of motion from a single price series.File | Dimensione | Formato | |
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