Biblioteca Dr. Uros Bacic

Abstract

This paper: (1) Gives a general argument why research on nonlinear science in general and chaos in particular is important in economics and finance. (2) Puts forth two definitions of stochastic nonlinearity (IID-Linearity and MDS- Linearity) for nonlinear time series analysis and argues for their usefulness as organizing con- cepts not only for discussion of nonlinearity testing but also for building a new class of struc- tural asset pricing models. (3) Shows how to use ideas from interacting particle systems theory to build structural asset pricing models that turn IID-Linear or MDS-Linear earnings processes into non MDS-Linear equilibrium returns processes. * I thank the NSF (SES-9122344) and the Vilas Trust for research support; and Steve Durlauf and Blake LeBaron for very useful comments. I thank Carlos Urzua for inviting me to present this work at a most exceptional conference. None of the above are responsible for errors, shortcomings, and opinions expressed in this paper. An earlier version of this paper circulated under the title, Beyond Randomness, or, Emergent Noise: Interactive Systems of Agents with Cross Dependent Characteristics/'

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