Properties of a simple bilinear stochastic model: Estimation and predictability

DOI10.1016/J.PHYSD.2007.08.020MaRDI QIDQ2482024zbMATH OpenOpenAlexFDO

Authors V. Pisarenko, D. Sornette

Publication date 16 April 2008

Published in Physica D (Search for Journal in Brave)

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

zbMATH Keywords

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

Mathematics Subject Classification ID

Stochastic models in economics (91B70)

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.

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