Oliver Linton and Mototsugu Shintani

Published May 2003

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This paper derives the asymptotic distribution of the nonparametric neural network estimator of the Lyapunov exponent in a noisy system. Positivity of the Lyapunov exponent is an operational definition of chaos. We introduce a statistical framework for testing the chaotic hypothesis based on the estimated Lyapunov exponents and a consistent variance estimator. A simulation study to evaluate small sample performance is reported. We also apply our procedures to daily stock return data. In most cases, the hypothesis of chaos in the stock return series is rejected at the 1% level with an exception in some higher power transformed absolute returns.