Bridge over ocean
1 September 1991 Financial Analysts Journal Volume 47, Issue 5

Testing Chaos and Nonlinearities in T-Bill Rates

  1. Maurice Larrain

Neither technical nor fundamental approaches can satisfactorily explain asset prices. Nonlinear dynamic techniques (chaos theory) that encompass both technical and fundamental factors, however, yield positive results. These nonlinear tests show that financial asset price behavior is not random at all; it only appears to be random.

Fundamental factors help to determine overall trends. Technical factors help to determine near-term price volatility. At certain times, future prices evolve from past prices in an orderly fashion. At other times, the evolution is explosive and seemingly random.

The structure generating both simple and complex future prices is of a very uncomplicated, exponential nature.

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