An application of the chaos theory in the Philippine stock market: A rescaled range analysis

• Main Authors: Esperanza, Maritess, Mercado, Ma. Cristina, Pinpin, Lord Lemuel
• Format: text
• Language: English
• Published: Animo Repository 1997
• Subjects: Chaotic behavior in systems; Stock-exchange; Stocks > Prices; Nonlinear theories; Efficient market theory; Mathematical analysis
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/16360
• Institution: De La Salle University

The Efficient Market Hypothesis has been the bedrock of quantitative capital market theory, and researches have been based on this concept. Analysis of the theory were based on this concept. Analysis of the theory were based on linear models. It assumes that people are rational, and prices reflect all available information. However, this assumption oversimplifies the market. Chaos theory tackles a different track from the Efficient Market Theory. Chaos theory which has been used in the field of science and math is recently being applied to finance and economics. Analysis of chaos theory is based on non-linear models. A chaotic system is characterized by a random-like behavior and a sensitive dependence on initial conditions. The proponents of the study aim: 1. To determine whether the prices of selected stocks in the Philippine Stock Exchange are chaotic in nature. To determine the cycle of selected stocks in the Philippine Stock Exchange. In order to conclude that stock market prices follow a chaotic behavior, the researchers used the Rescaled Range Analysis (R/S). The prices of selected stocks were used to compute for the Hurst Exponent. After deriving the Hurst Exponent, the researchers computed and graphed the V-Stat to determine the cycle of selected stocks. The study revealed that on the average, prices of stocks on a five-trading-day interval in the Philippine Stock Market is non-linear and not random.