Non-linear Dynamics and Recurrent Patterns in Stock Markets: A Comparison Between BIST-100 and S&P500 Indices

Abstract

The financial systems, and particularly stock markets are complex systems. In this study, we investigate the evidence of chaotic dynamics of both BIST-100 stock market index and S&P 500 index. We compute Lyapunov exponents of stock market indices daily return series over the period from 27 May 2018 to 26 May 2022. The time interval under examination is chosen to reflect the effects of Covid-19 pandemic crisis on global financial markets, where extraordinary economic and financial policies have been implemented.The results of the study demonstrate that both BIST-100 and S&P500 indices exhibit chaotic behavior and associated maximal Lyapunov exponents are calculated to be positive, respectively. Both BIST-100 and S&P500 indices have equilibria around positive return values, reflecting the extraordinary effects of expansionary monetary and fiscal policies. Moreover, the magnitude of equilibria positive returns in S&P500 index is greater than that of BIST-100 index, which implies that cumulative effect of expansionary monetary and fiscal policy in U.S. economy overwhelms. The findings of the study suggest that greater positive return availability in S&P500 lowers the demand for emerging market assets and hence the capital inflow in BIST-100 stock market. The chaotic behavior eventually leads to an increase in complexity and recurrently causes volatility in stock markets. Therefore, in perspective of policy making inflation targeting should be considered as a main financial stability strategy to increase demand for Turkish assets and to enable capital inflows. Given upcoming monetary policy of global Central banks, our findings have important implications for policy making as well as portfolio and risk management.