Chaos Measure Dynamics in a Multifactor Model for Financial Market Predictions

Communications in Nonlinear Science and Numerical Simulation Available online 2 December 2023, 107760

35 Pages Posted: 20 Oct 2022 Last revised: 4 Dec 2023

Multiple version iconThere are 2 versions of this paper

Date Written: September 13, 2022

Abstract

Abstract. To answer the question if chaos changes over time, we apply rolling windows to wavelet-denoised logarithmic S&P500 returns (2000-2020) and calculate consecutive chaos measures (e.g., Hurst-, maximum Lyapunov exponent or sample entropy). We state time-variation of the chaos measure series, indicating chaos instability or inherent chaotic time variations of the underlying (hyper-) chaotic deterministic S&P500 return system. Moreover, we indent to use these chaos measure series as predictors for the denoted financial series. An optimised selection of these series is used as input features for a dynamic factor model realised as deep learning multilayer perception neural network to predict the original S&P500 price and return series out-of-sample. The approach is validated by performance metrics (e.g., explained variance score) and the residuals are shown to be non-autocorrelated and ~iid. Finally, we compare the results with selected base or benchmark models (e.g., autoregressive models). Thus, the approach provides a novel multifactor model for practical market price predictions from a dynamical (inherent) system-based view.

Keywords: time-varying chaos, chaos instability, dynamic factor model, deep learning neural network financial predictions, financial market predictions

JEL: G1, C01, C02, C22, C18
MSC: 65P20, 37N30, 65P40, 91-10

Keywords: time-varying chaos, chaos instability, dynamic factor model, deep learning neural network financial predictions, financial market predictions

JEL Classification: G1, C01, C02, C22, C18

Suggested Citation

Vogl, Markus, Chaos Measure Dynamics in a Multifactor Model for Financial Market Predictions (September 13, 2022). Communications in Nonlinear Science and Numerical Simulation Available online 2 December 2023, 107760, Available at SSRN: https://ssrn.com/abstract=4251673 or http://dx.doi.org/10.2139/ssrn.4251673

Markus Vogl (Contact Author)

Vogl-Datascience ( email )

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