Having spent some time on the literature on nonlinearity and chaos, I see many recent studies published in journals such as, but not limited to, Energy Economics, Physica A, Applied Financial Economics, Economics Letters, Applied Economics Letters, Review of Financial Economics, and Journal of Macroeconomics, that that test for nonlinearity and chaos using univariate tests such as, but not limited to, McLeod-Li test, BDS test, Tsay test, Engle’s LM test, Hinich’s bicorrelation and bispectrum test, and Lyapunov exponent test.,
Are there any multivariate nonlinearity tests that would helps us investigate prevalence of nonlinearity amidst the inter-relationship between assets such as depository receipts (or ETFs) and their underlying stocks (or for that matters, generally speaking, between any asset and a derivative based on the underlying asset that is traded at the same/different location and at the same/different time)?
Vinodh,
I believe what you are searching for is a method of testing for two or more nonlinear dynamical systems. If so, look up the method of mutual prediction in our recent article "Nonlinear interdependence of Chinese stock markets," in Quantitative Finance, Vol. 12, Issue 3, 397-410, and references therein.
Dear Prof. Soofi
I thank you very much for your valuable inputs. I will go through your article and get back to you.
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