The Impact of Information Signals on Market Prices When Agents Have Non-Linear Trading Rules

Abstract

Several methods have been developed for filtering seasonal structures and extreme returns in financial and economic series. The theoretical support for this approach is rather questionable since it focuses on the effects of shocks on prices and not on their sources. The non-proportional character of non-linearity confirms that removing outliers or seasonality does not help to reach the true generating system of market dynamics. Thus, taking into account that the underlying process of economic series is highly non-linear we cannot be sure a priori what the impact of new information will be on the dynamic structure of the system. The main contribution of this paper is to demonstrate using the methodology of simulations the eventual distortions in time series data arising from the arrival of news when agents' follow non-linear trading strategies. We argue that if news can really modify the dynamical behaviour of a system, then the methodology of filtering seasonality and outliers needs to be re-examined.

Keywords: non-linearity, Logistic equation, Heteroskedastic Mackey-Glass model, attractors, information signals, spurious seasonality

JEL Classification: C15, C22, C52, G14