Evidence of chaos in commodity futures prices

✍ Scribed by Gregory P. Decoster; Walter C. Labys; Douglas W. Mitchell

• Publisher: John Wiley and Sons
• Year: 1992
• Tongue: English
• Weight: 887 KB
• Volume: 12
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990120305

✦ Synopsis

Equilibrium pricing of futures contracts within the capital market -how are they related to the prices of other risky assets?

This study is concerned with the second issue; specifically, whether there exists nonlinear dynamic structure and, in particular, chaotic structure in the behavior of futures prices.' Chaotic dynamic systems are capable of generating a rich variety of time series patterns, and such time series are often random-appearing. Yet, if such structure can be shown to exist, the implication would be that the empirical validity of simple, early versions of the efficient markets hypothesis [e.g., Fama (1970)l which imply a random walk for asset prices is called into question.' This would indicate that future research should be directed toward the difficult task of identifying the specific form of the underlying price structure. When that is accomplished, a

The authors are grateful to Curt Taylor for his excellent and extensive programming assistance, and to Rachel Connelly, Dan Gijsbers, and John Georgellis for their generous help.

'Chaos refers to deterministic dynamic behavior which is bounded and neither periodic nor asymptotically periodic. Some nonlinear dynamic equations generate chaos, while some generate periodic behavior (repeating sequences). Accessible introductions to the mathematics of chaos are to be found in , Kelsey (1988), , Baumol and Frank and Stengos (1988a).

' presents a model in which asset prices can evolve according to the logistic equation, which admits chaos, implying that rates of return would not be white noise. gives another model with structure in rates of return.

Gregory l ? DeCoster is an Assistant Professor of Economics at Bowdoin College.