Properties of a simple bilinear stochastic model: Estimation and predictability

DOI10.1016/J.PHYSD.2007.08.020zbMATH Open1133.91504arXivphysics/0703217OpenAlexW2077612666MaRDI QIDQ2482024FDOQ2482024

Authors: V. Pisarenko, D. Sornette 

Publication date: 16 April 2008

Published in: Physica D (Search for Journal in Brave)

Abstract: We analyze the properties of arguably the simplest bilinear stochastic multiplicative process, proposed as a model of financial returns and of other complex systems combining both nonlinearity and multiplicative noise. By construction, it has no linear predictability (zero two-point correlation) but a certain nonlinear predictability (non-zero three-point correlation). It can thus be considered as a paradigm for testing the existence of a possible nonlinear predictbility in a given time series. We present a rather exhaustive study of the process, including its ability to produce fat-tailed distribution from Gaussian innovations, the unstable characteristics of the inversion of the key nonlinear parameters and of the two initial conditions necessary for the implementation of a prediction scheme and an analysis of the associated super-exponential sensitivity of the inversion of the innovations in the presence of a large impluse. Our study emphasizes the conditions under which a degree of predictability can be achieved and describes a number of different attempts, which overall illuminates the properties of the process. In conclusion, notwithstanding its remarkable simplicity, the bilinear stochastic process exhibits remarkably rich and complex behavior, which makes it a serious candidate for the modeling of financial times series and of other complex systems.

Full work available at URL: https://arxiv.org/abs/physics/0703217

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zbMATH Keywords

predictionestimationbilinearnonlinear dependencemultiplicative noisesensitive dependence on initial conditionsfat-tail distributionsVolterra discrete series

Mathematics Subject Classification ID

Stochastic models in economics (91B70)

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Cited In (2)

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• Variational Bayesian identification and prediction of stochastic nonlinear dynamic causal models

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