Predicting British financial indices: An approach based on chaos theory

Abstract Non-linear deterministic systems are capable of generating chaotic output that mimics the output of stochastic systems. We test British financial indices to see if they are chaotic. The results of our tests of chaotic dynamics are not conclusive. We found some difficulties in calculating the correlation dimension due to insufficient economic data. Our main contribution is to generate short-term prediction for our series which have better predictive properties than traditional linear auto-regressive procedures. We use a non-parametric procedure advocated by biologists in predicting time series in a chaos framework.

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