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Unimodal maps perturbed by heteroscedastic noise: an application to a financial systems

Author

Listed:
  • F. Lillo
  • G. Livieri
  • S. Marmi
  • A. Solomko
  • S. Vaienti

Abstract

We investigate and prove the mathematical properties of a general class of one-dimensional unimodal smooth maps perturbed with a heteroscedastic noise. Specifically, we investigate the stability of the associated Markov chain, show the weak convergence of the unique stationary measure to the invariant measure of the map, and show that the average Lyapunov exponent depends continuously on the Markov chain parameters. Representing the Markov chain in terms of random transformation enables us to state and prove the Central Limit Theorem, the large deviation principle, and the Berry-Ess\`een inequality. We perform a multifractal analysis for the invariant and the stationary measures, and we prove Gumbel's law for the Markov chain with an extreme index equal to 1. In addition, we present an example linked to the financial concept of systemic risk and leverage cycle, and we use the model to investigate the finite sample properties of our asymptotic results.

Suggested Citation

  • F. Lillo & G. Livieri & S. Marmi & A. Solomko & S. Vaienti, 2023. "Unimodal maps perturbed by heteroscedastic noise: an application to a financial systems," Papers 2305.13475, arXiv.org.
    • Handle: RePEc:arx:papers:2305.13475
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    References listed on IDEAS

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    1. Mazzarisi, Piero & Lillo, Fabrizio & Marmi, Stefano, 2019. "When panic makes you blind: A chaotic route to systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 176-199.
    2. Jarque, Carlos M. & Bera, Anil K., 1980. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals," Economics Letters, Elsevier, vol. 6(3), pages 255-259.
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