Long memory and chaotic models of prices on the London Metal Exchange

Abstract

Many financial time series exhibit irregular behaviour. Economic theory suggests that this irregular behaviour might be due to the existence of nonlinear dependence in the markets. Thus, economic time series are governed by nonlinear dynamics. The purpose of this paper is to investigate price behaviour in the London Metal Exchange market. Thus, this study will test the two most attractive nonlinear models—long memory and chaos—on six metal commodities to ascertain which model is consistent with the observed metal price nonlinear dynamics. Application of long memory and chaos analysis provides new approaches for assessing the behaviour of metal prices. We identified, in tin, a case of chaos. Our empirical results in the case of aluminium support the long memory hypothesis. A short memory model explains the underlying processes of the nickel and lead returns series, while zinc returns reflect an anti-persistent process. To our knowledge, this is one of the first attempts to apply long memory and chaos analysis in the evaluation of the behaviour of metal prices.