Does chaos really matter? The answer to this question depends on who you are asking. For technical analysts, the answer is clearly no, even if patterns in market prices, such as exchange rates, never recur in exactly the same manner.
Trading rules still have predictive power for technical analysts. Moreover, the prediction problem associated with chaos in, for example, foreign exchange markets with target zones, i. e. fixed exchange rate regimes with bands, may be negligible if the bands are small.
For example, if the band is f1% around some target rate, the prediction error can never be larger than 2%. Chaos still has several important implications that must be considered in economics.
For example, the prediction problem associated with chaos cannot be entirely
neglected because the aforementioned example of target zones with small
bands is an exception. In most cases, the bands are either large or they are absent, i. e. flexible exchange rates regimes are adopted.
This means that nonlinear dynamics in general and chaotic dynamics in particular in the foreign exchange market have important implications for modelling purposes, i. e. for economic theory.
Prof. Mikael Bask
Next: References A-H
Summary: Index