Observations of deterministic chaos in financial time series by recurrence plots, can one control chaotic economy?

Several economical time series such as exchange rates US$/British Pound, USA Treasure Bonds rates and Warsaw Stock Index WIG have been investigated using the method of recurrence plots. The percentage of recurrence REC and the percentage of determinism DET have been calculated for the original and for shuffled data. We have found that in some cases the values of REC and DET parameters are about 20% lower for the surrogate data which indicates the presence of unstable periodical orbits in the considered data. A similar result has been obtained for the chaotic Lorenz model contaminated by noise. Our investigations suggest that real economical dynamics is a mixture of deterministic and stochastic chaos. We show how a simple chaotic economic model can be controlled by appropriate influence of time-delayed feedback. Received 13 October 2000     

Tachyons, Lamb shifts and superluminal chaos

An elementary account on the origins of cosmic chaos in an open and multiply connected universe is given; there is a finite region in the open 3-space in which the world-lines of galaxies are chaotic, and the mixing taking place in this chaotic nucleus of the universe provides a mechanism to create equidistribution. The galaxy background defines a distinguished frame of reference and a unique cosmic time order; in this context superluminal signal transfer is studied. Tachyons are described by a real Proca field with negative mass square, coupled to a current of subluminal matter. Estimates on tachyon mixing in the geometric optics limit are derived. The potential of a static point source in this field theory is a damped periodic function. We treat this tachyon potential as a perturbation of the Coulomb potential, and study its effects on energy levels in hydrogenic systems. By comparing the induced level shifts to high-precision Lamb shift measurements and QED calculations, we suggest a tachyon mass of 2.1 keV/c² and estimate the tachyonic coupling strength to subluminal matter. The impact of the tachyon field on ground state hyperfine transitions in hydrogen and muonium is investigated. Bounds on atomic transition rates effected by tachyon radiation as well as estimates on the spectral energy density of a possible cosmic tachyon background radiation are derived. Received 13 August 1999 and Received in final form 7 February 2000     

Theoretical and experimental study of discrete behavior of Shilnikov chaos in a CO 2 laser

The discrete distribution of homoclinic orbits has been investigated numerically and experimentally in a CO₂ laser with feedback. The narrow chaotic ranges appear consequently when a laser parameter (bias voltage or feedback gain) changes exponentially. Up to six consecutive chaotic windows have been observed in the numerical simulation as well as in the experiments. Every subsequent increase in the number of loops in the upward spiral around the saddle focus is accompanied by the appearance of the corresponding chaotic window. The discrete character of homoclinic chaos is also demonstrated through bifurcation diagrams, eigenvalues of the fixed point, return maps, and return times of the return maps. Received 28 September 2000 and 27 October 2000     

Strange attractor simulated on a quantum computer

We show that dissipative classical dynamics converging to a strange attractor can be simulated on a quantum computer. Such quantum computations allow to investigate efficiently the small scale structure of strange attractors, yielding new information inaccessible to classical computers. This opens new possibilities for quantum simulations of various dissipative processes in nature. Received 10 August 2002 Published online 29 October 2002 RID="a" ID="a"e-mail: dima@irsamc.ups-tlse.fr RID="b" ID="b"UMR 5626 du CNRS     

Beliefs and stochastic modelling of interest rate scenario risk

We present a framework that allows for a systematic assessment of risk given a specific model and belief on the market. Within this framework the time evolution of risk is modeled in a twofold way. On the one hand, risk is modeled by the time discrete and nonlinear garch(1,1) process, which allows for a (time-)local understanding of its level, together with a short term forecast. On the other hand, via a diffusion approximation, the time evolution of the probability density of risk is modeled by a Fokker-Planck equation. Then, as a final step, using Bayes theorem, beliefs are conditioned on the stationary probability density function as obtained from the Fokker-Planck equation. We believe this to be a highly rigorous framework to integrate subjective judgments of future market behavior and underlying models. In order to demonstrate the approach, we apply it to risk assessment of empirical interest rate scenario methodologies, i.e. the application of Principal Component Analysis to the the dynamics of bonds. Received 1st August 2000     

Extracting factors for interest rate scenarios

Factor based interest rate models are widely used for risk managing purposes, for option pricing and for identifying and capturing yield curve anomalies. The movements of a term structure of interest rates are commonly assumed to be driven by a small number of orthogonal factors such as SHIFT, TWIST and BUTTERFLY (BOW). These factors are usually obtained by a Principal Component Analysis (PCA) of historical bond prices (interest rates). Although PCA diagonalizes the covariance matrix of either the interest rates or the interest rate changes, it does not use both covariance matrices simultaneously. Furthermore higher linear and nonlinear correlations are neglected. These correlations as well as the mean reverting properties of the interest rates become crucial, if one is interested in a longer time horizon (infrequent hedging or trading). We will show that Independent Component Analysis (ICA) is a more appropriate tool than PCA, since ICA uses the covariance matrix of the interest rates as well as the covariance matrix of the interest rate changes simultaneously. Additionally higher linear and nonlinear correlations may be easily incorporated. The resulting factors are uncorrelated for various time delays, approximately independent but nonorthogonal. This is in contrast to the factors obtained from the PCA, which are orthogonal and uncorrelated for identical times only. Although factors from the ICA are nonorthogonal, it is sufficient to consider only a few factors in order to explain most of the variation in the original data. Finally we will present examples that ICA based hedges outperforms PCA based hedges specifically if the portfolio is sensitive to structural changes of the yield curve. Received 1st August 2000     

Propagation of waves and chaos in transmission line with strongly anharmonic dangling resonator

Delayed differential equation of motion with multiple lags is derived for an anharmonic stub resonator coupled to a monomode transmission line. Transmission and reflection coefficients are found analytically in the harmonic approximation. Nonlinear response of the system is analysed by an electric circuit obeying the same equations of motion. Enhanced second harmonic generation is found at the frequencies, which in the harmonic approximation correspond to the zeros of transmission. An aperiodic (chaotic) response is found mainly in the frequency range close to the resonance of the dangling resonator. Zeros of transmission and total transmissions are shown to be lifted by the anharmonicity nearly in the same frequency region. Higher harmonics are preferentially transmitted at the zero transmission points in the presence of anharmonicity. Received 14 March 2002 / Received in final form 25 November 2002 Published online 14 March 2003     

An integrable model in general relativity

Melnikov-method-based theoretical results are demonstrated concerning the relative effectiveness of any two weak excitations in suppressing homoclinic/heteroclinic chaos of a relevant class of dissipative, low-dimensional and non-autonomous systems for the main resonance between the chaos-inducing and chaos-suppressing excitations. General analytical expressions are derived from the analysis of generic Melnikov functions providing the boundaries of the regions as well as the enclosed area in the amplitude/initial phase plane of the chaos-suppressing excitation where homoclinic/heteroclinic chaos is inhibited. The relevance of the theoretical results on chaotic attractor elimination is confirmed by means of Lyapunov exponent calculations for a two-well Duffing oscillator. Received 21 May 2002 / Received in final form 13 September 2002 Published online 29 November 2002     

Entropy and optimal partition for data analysis

The concept of symbolic dynamics, entropy and complexity measures has been widely utilized for the analysis of measured time series. However, little attention as been devoted to investigate the effects of choosing different partitions to obtain the coarse-grained symbolic sequences. Because the theoretical concepts of generating partitions mostly fail in the case of empirical data, one commonly introduces a homogeneous partition which ensures roughly equidistributed symbols. We will show that such a choice may lead to spurious results for the estimated entropy and will not fully reveal the randomness of the sequence. Received 1st September 2000     

From market games to real-world markets

This paper uses the development of multi-agent market models to present a unified approach to the joint questions of how financial market movements may be simulated, predicted, and hedged against. We first present the results of agent-based market simulations in which traders equipped with simple buy/sell strategies and limited information compete in speculatory trading. We examine the effect of different market clearing mechanisms and show that implementation of a simple Walrasian auction leads to unstable market dynamics. We then show that a more realistic out-of-equilibrium clearing process leads to dynamics that closely resemble real financial movements, with fat-tailed price increments, clustered volatility and high volume autocorrelation. We then show that replacing the `synthetic' price history used by these simulations with data taken from real financial time-series leads to the remarkable result that the agents can collectively learn to identify moments in the market where profit is attainable. Hence on real financial data, the system as a whole can perform better than random. We then employ the formalism of Bouchaud in conjunction with agent based models to show that in general risk cannot be eliminated from trading with these models. We also show that, in the presence of transaction costs, the risk of option writing is greatly increased. This risk, and the costs, can however be reduced through the use of a delta-hedging strategy with modified, time-dependent volatility structure. Received 30 August 2000     

Ground state pressure and energy density of an interacting homogeneous Bose gas in two dimensions

We consider an interacting homogeneous Bose gas at zero temperature in two spatial dimensions. The properties of the system can be calculated as an expansion in powers of g, where g is the coupling constant. We calculate the ground state pressure and the ground state energy density to second order in the quantum loop expansion. The renormalization group is used to sum up leading and subleading logarithms from all orders in perturbation theory. In the dilute limit, the renormalization group improved pressure and energy density are expansions in powers of the T ^2B and T ^2Bln(T ^2B), respectively, where T ^2B is the two-body T-matrix. Received 19 April 2002 Published online 13 August 2002     

Quantum computer inverting time arrow for macroscopic systems

Since Boltzmann developed the statistical theory for macroscopic thermodynamics the question has relentlessly been put forward of how time-reversibility at microscopic level is compatible with macroscopic irreversibility. Here we show that a quantum computer can efficiently simulate a macroscopic thermodynamic process with chaotic microscopic dynamics and invert the time arrow even in presence of quantum errors. In contrast, small errors in classical computer simulation of this dynamics grow exponentially with time and rapidly destroy time-reversibility. Received 31 October 2001     

Optimal trading from minimizing the period of bankruptcy risk

Assuming that financial markets behave similar to random walk processes we derive a trading strategy with variable investment which is based on the equivalence of the period of bankruptcy risk and the risk to profit ratio. We define a state dependent predictability measure which can be attributed to the deterministic and stochastic components of the price dynamics. The influence of predictability variations and especially of short term inefficiency structures on the optimal amount of investment is analyzed in the given context and a method for adaptation of a trading system to the proposed objective function is presented. Finally we show the performance of our trading strategy on the DAX and S&P 500 as examples for real world data using different types of prediction models in comparison. Received 15 September 2000 and Received in final form 2 October 2000     

Hammerstein system represention of financial volatility processes

We show new modeling aspects of stock return volatility processes, by first representing them through Hammerstein Systems, and by then approximating the observed and transformed dynamics with wavelet-based atomic dictionaries. We thus propose an hybrid statistical methodology for volatility approximation and non-parametric estimation, and aim to use the information embedded in a bank of volatility sources obtained by decomposing the observed signal with multiresolution techniques. Scale dependent information refers both to market activity inherent to different temporally aggregated trading horizons, and to a variable degree of sparsity in representing the signal. A decomposition of the expansion coefficients in least dependent coordinates is then implemented through Independent Component Analysis. Based on the described steps, the features of volatility can be more effectively detected through global and greedy algorithms. Received 31 December 2001     

Spatial orders appearing at instabilities of synchronous chaos of spatiotemporal systems

Various spatial orders introduced by the instabilities of synchronous chaotic state of spatiotemporal systems are investigated by considering coupled map lattice and chaotic partial differential equation. In particular, the motions of on-off intermittent states at the onset of the instabilities are studied in detail. The chaotic desynchronized patterns can be described by a simple universal form, including three parts: the synchronous chaos; a spatially ordered pattern, determined by the unstable mode of the reference synchronous chaos; and on-off intermittency of the scale of this given pattern. Received 31 July 2002 / Received in final form 20 November 2002 Published online 31 December 2002     

False Euro (FEUR) exchange rate correlated behaviors and investment strategy

We have searched for correlations and anticorrelations with respect to currencies as CHF, DKK, JPY, and USD in order to understand the EUR behavior. In order to do so we have invented a false euro (FEUR) dating back to 1993 and have derived simulated exchange rates of the FEUR. Within the Detrended Fluctuation Analysis (DFA) statistical method we have obtained the power law behavior describing the rms. deviation of the fluctuations as a function of time. We have compared the time-dependent exponent for these four exchange rates, and observe the role of the DEM, and the other currencies forming the EUR. A simple investment strategy based on the local DFA technique shows one can obtain appreciable gains, even taking into account some modest transaction fee. We compare the time dependent α exponent of the DFA for various exchange rates as in a correlation matrix for estimating respective influences. Received 31 August 2000     

Waiting time distributions in financial markets

We study waiting time distributions for data representing two completely different financial markets that have dramatically different characteristics. The first are data for the Irish market during the 19th century over the period 1850 to 1854. A total of 10 stocks out of a database of 60 are examined. The second database is for Japanese yen currency fluctuations during the latter part of the 20th century (1989-1992). The Irish stock activity was recorded on a daily basis and activity was characterised by waiting times that varied from one day to a few months. The Japanese yen data was recorded every minute over 24 hour periods and the waiting times varied from a minute to a an hour or so. For both data sets, the waiting time distributions exhibit power law tails. The results for Irish daily data can be easily interpreted using the model of a continuous time random walk first proposed by Montroll and applied recently to some financial data by Mainardi, Scalas and colleagues. Yen data show a quite different behaviour. For large waiting times, the Irish data exhibit a cut off; the Yen data exhibit two humps that could arise as result of major trading centres in the World. Received 31 December 2001     

Controlling chaos by a modified straight-line stabilization method

By adjusting external control signal, rather than some available parameters of the system, we modify the straight-line stabilization method for stabilizing an unstable periodic orbit in a neighborhood of an unstable fixed point formulated by Ling Yang et al., and derive a more simple analytical expression of the external control signal adjustment. Our technique solves the problem that the unstable fixed point is independent of the system parameters, for which the original straight-line stabilization method is not suitable. The method is valid for controlling dissipative chaos, Hamiltonian chaos and hyperchaos, and may be most useful for the systems in which it may be difficult to find an accessible system parameter in some cases. The method is robust under the presence of weak external noise. Received 10 January 2001     

Are EUR and GBP different words for the same currency?

The British Pound (GBP) is not part of the Euro (EUR) monetary system. In order to find out arguments on whether GBP should join the EUR or not correlations are calculated between GBP exchange rates with respect to various currencies: USD, JPY, CHF, DKK, the currencies forming EUR and a reconstructed EUR for the time interval from 1993 till June 30, 2000. The distribution of fluctuations of the exchange rates is Gaussian for the central part of the distribution, but has fat tails for the large size fluctuations. Within the Detrended Fluctuation Analysis (DFA) statistical method the power law behavior describing the root-mean-square deviation from a linear trend of the exchange rate fluctuations is obtained as a function of time for the time interval of interest. The time-dependent exponent evolution of the exchange rate fluctuations is given. Statistical considerations imply that the GBP is already behaving as a true EUR. Received 31 December 2001     

Mechanistic approach to generalized technical analysis of share prices and stock market indices

Classical technical analysis methods of stock evolution are recalled, i.e. the notion of moving averages and momentum indicators. The moving averages lead to define death and gold crosses, resistance and support lines. Momentum indicators lead the price trend, thus give signals before the price trend turns over. The classical technical analysis investment strategy is thereby sketched. Next, we present a generalization of these tricks drawing on physical principles, i.e. taking into account not only the price of a stock but also the volume of transactions. The latter becomes a time dependent generalized mass. The notion of pressure, acceleration and force are deduced. A generalized (kinetic) energy is easily defined. It is understood that the momentum indicators take into account the sign of the fluctuations, while the energy is geared toward the absolute value of the fluctuations. They have different patterns which are checked by searching for the crossing points of their respective moving averages. The case of IBM evolution over 1990-2000 is used for illustrations. Received 31 December 2001