Do successful applications of chaos theory to quant finance exist ?

While still in the university I remember some people mentioning how chaos theory and fractals could be applied in a finance context.

The topic has kind of escaped my radar until now. Usually I am quite skeptical when it comes to the application of new research to quant finance. Often the added value isn’t significant but the increase in complexity is. It starts with some famous researching mentioning how some purely theoretical concept might be applied e.g. in pricing derivatives. This precipitates a small landslide of academic research (mostly done by PhD students). After a while people in finance notice those ideas and try first implementations which then show the added benefit to be only marginal.

As I seet it generally two aspects of chaos theory could be suited for a financial application:

  • spontaneous order (might be used to model how market prices come to pass)
  • distinguishing between random and chaotic data (might be usefuly when dealing with financial time series)

Some references that I personally find interesting:

The book by mandelbrot intrigues me the most - I put it on my to read list out of curiosity

  • $\begingroup$ Define what you call chaos theory. $\endgroup$ – lcrmorin May 28 '14 at 8:55
  • 1
    $\begingroup$ vaild point - I will try to update the question today $\endgroup$ – Probilitator May 28 '14 at 10:27

I think one notable application of chaos theory (in the sense of non-linear dynamics) in financial markets is the work done by phyicist Didier Sornette.

You can find most of his publications and projects (actually lots of them) here on his page at the ETH Zürich: http://www.er.ethz.ch/fco

  • $\begingroup$ @Probilitator: You are very welcome... so why not just accepting my answer ;-))) $\endgroup$ – vonjd Jun 6 '14 at 20:43

Benoit Mandelbrot applied fractals and self-similarity to financial markets and the hurst exponent has its roots in chaos theory.

Look at this article from Wilmott magazine.

Just a personal note: I have not worked that much with this kind of theory so far but I also have not seen any of my peers being exceptionally sucessfull with these methods.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.