The Journal of Finance

Chaos and Nonlinear Dynamics: Application to Financial Markets

Published: 12/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb04646.x

DAVID A. HSIEH

After the stock market crash of October 19, 1987, interest in nonlinear dynamics, especially deterministic chaotic dynamics, has increased in both the financial press and the academic literature. This has come about because the frequency of large moves in stock markets is greater than would be expected under a normal distribution. There are a number of possible explanations. A popular one is that the stock market is governed by chaotic dynamics. What exactly is chaos and how is it related to nonlinear dynamics? How does one detect chaos? Is there chaos in financial markets? Are there other explanations of the movements of financial prices other than chaos? The purpose of this paper is to explore these issues.

Rational Expectations and Risk Premia in Forward Markets: Primary Metals at the London Metals Exchange

Published: 12/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb03612.x

DAVID A. HSIEH, NALIN KULATILAKA

This paper tests whether forward prices equal the traders' expectations of the future spot prices at maturity, under two different models of expectations formation: full information rational expectations and incomplete information mechanical forecasting rule. The tests are performed, over the period January 1970 through September 1980, on the forward markets for the primary metals—copper, tin, lead, and zinc‐traded in the London Metals Exchange. We find evidence consistent with the existence of time varying risk premia.

Margin Regulation and Stock Market Volatility

Published: 03/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb05078.x

DAVID A. HSIEH, MERTON H. MILLER

Using daily and monthly stock returns we find no convincing evidence that Federal Reserve margin requirements have served to dampen stock market volatility. The contrary conclusion, expressed in recent papers by Hardouvelis (1988a, b), is traced to flaws in his test design. We do detect the expected negative relation between margin requirements and the amount of margin credit outstanding. We also confirm the recent finding by Schwert (1988) that changes in margin requirements by the Fed have tended to follow rather than lead changes in market volatility.

A New Approach to International Arbitrage Pricing

Published: 12/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb05126.x

RAVI BANSAL, DAVID A. HSIEH, S. VISWANATHAN

This paper uses a nonlinear arbitrage‐pricing model, a conditional linear model, and an unconditional linear model to price international equities, bonds, and forward currency contracts. Unlike linear models, the nonlinear arbitrage‐pricing model requires no restrictions on the payoff space, allowing it to price payoffs of options, forward contracts, and other derivative securities. Only the nonlinear arbitrage‐pricing model does an adequate job of explaining the time series behavior of a cross section of international returns.

Hedge Funds: Performance, Risk, and Capital Formation

Published: 07/19/2008   |   DOI: 10.1111/j.1540-6261.2008.01374.x

WILLIAM FUNG, DAVID A. HSIEH, NARAYAN Y. NAIK, TARUN RAMADORAI

We use a comprehensive data set of funds‐of‐funds to investigate performance, risk, and capital formation in the hedge fund industry from 1995 to 2004. While the average fund‐of‐funds delivers alpha only in the period between October 1998 and March 2000, a subset of funds‐of‐funds consistently delivers alpha. The alpha‐producing funds are not as likely to liquidate as those that do not deliver alpha, and experience far greater and steadier capital inflows than their less fortunate counterparts. These capital inflows attenuate the ability of the alpha producers to continue to deliver alpha in the future.