Chaos theory in financial market prediction

Abstract

In science, there are situations that are difficult to predict satisfactorily. For example, in the case of meteorology, a very important problem is to be able to predict the weather that will prevail not only the next day, but a week, a month, a year later. However, despite the fact that this science has developed and many people have worked on it for more than a century, this type of prediction has not been able to be carried out effectively.

In physics, we can mention the phenomenon of turbulence. When a fluid moves along a tube, under certain conditions the fluid does so in a very calm and regular manner; it is said that the flow is laminar and its properties can be determined. However, in other circumstances, the flow becomes turbulent: first small eddies begin to appear, then larger and larger eddies and the movement of the fluid becomes very irregular (Schifter) it is said that the flow has entered into turbulence. This effect had not been able to be understood in more than a hundred years of study of hydrodynamics without the theory of chaos. In economics and finance, the problem is similar. The reasons why the stock market index starts to rise and then falls at a certain moment have not been determined. In many cases it seems to be a random phenomenon (Chorofos).