Empirical Study of Chaotic Behavior in the Taiwanese Stock Market

Abstract

Traditionally, market returns have been assumed to be consistent with the random walk hypothesis. Explaining anomalies in market returns, such as seasonal effects, the weekend effect, and the January effect, is difficult. This study examined time series data on Taiwan Weighted Index returns from the perspective of chaos theory. A topological method, the close returns test, was applied to test whether Taiwan stock market returns exhibited chaotic behavior. The main findings of this study are that close returns test outperformed the traditional BDS (Brock, Dechert, Scheinkman) test and that Taiwan stock market returns exhibit recursive behavior rather than random walk behavior.