Chaos Dynamics and Stochastic Volatility

STRATHMORE UNIVERSITY
SCHOOL OF FINANCE AND APPLIED ECONOMICS
Year 4, Semester 2
Empirical Finance
Group Assignment

Chaos Dynamics and Stochastic Volatility
Application to Financial Markets

January 29, 2014

Group Members
059831
059882
060139
061074

Oile, Kenneth Ogola
Ndirangu, Evelyn Chaki
Nzesya, Lilian Mwikali
Chege, Eric Theuri

Lecturer
Mr Ferdinand Othieno

Table of Contents
Abstract .............................................................................................................................................................. ii
1

Chaos and Non-Linear Dynamics ..................................................................................................... 1
1.1

Introduction .................................................................................................................................... 1

1.2

The Random Walk Hypothesis ................................................................................................ 1

1.3

Random vs. Unpredictable ........................................................................................................ 2

1.4

Chaos Theory.................................................................................................................................. 2

1.5

Mathematical Abstraction ......................................................................................................... 3

1.5.1 The BDS Statistic....................................................................................................................... 5
1.6
1.7
2

Empirical Examples Demonstrating Random Market Hypothesis Failures ........... 6
Conclusions and Remarks ......................................................................................................... 7

Stochastic Volatility ............................................................................................................................... 8
2.1

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