Recurrence Plots and Cross Recurrence Plots

Global Finance Journal, 12(1), 139–151p. (2001) DOI:10.1016/S1044-0283(01)00018-7

An examination of nonlinear dependence in exchange rates, using recent methods from chaos theory

Interest in the relevance of nonlinear dynamics to finance and economics has spurred the evolution of new ways to analyze time series data. Tests for chaos, based on a metric approach which measures spatial correlations, led to the development of the correlation dimension test for chaos and the BDS test for nonlinearity. More recently, a topological method has been introduced into the scientific literature which employs a simple qualitative test for chaos that is adaptable to the characteristics of financial data. A quantitative version is also presented here. Conflicting evidence exists about the presence of chaotic behavior in exchange-rate data. The qualitative topological test does not support evidence of a chaotic generating mechanism in these series. The quantitative form finds nonlinear dependence and is a useful diagnostic to determine the adequacy of ARCH-type models for this nonlinear structure.