The Research Of Financial Chaos Based On Phase Space Reconstruction Technology

Finance is the core of modern market economy; and the financial system's security, stability, and order are the key to the development of economy and social stability. However, with financial liberalization, globalization and the rapid development of financial innovation, financial system has increasingly become an open nonlinear complex system; the dynamic evolution behavior of this system not only subject to non-equilibrium constraints of external environment, but also depends on the interactions of inherent nonlinear factors. In practice, due to the certain instability during the operation of financial system, which results in quantitative changes (similar to the bifurcation) to a qualitative change (chaos) , there sometimes appears such as unusual turbulence in financial market, financial crisis and other financial chaos. The emergence of these financial chaoses seriously reduces the efficiency of allocating resources of market, and has great negative impact on the growth of economy and social stability. Especially, the global financial crisis reminds us that the instability of financial system may lead to the emergence of financial chaos once again, which is bound to bring disaster and misfortune to economy and society. Therefore, how to avoid and control financial chaos and to maintain stable and orderly operation of financial system has become a difficult problem in the world financial industry.Meanwhile, with inherent complexity and nonlinearity of real financial system, it is very difficult and unrealistic to construct a perfect mathematical model to describe its running characterization. In fact, we can only get some time series of its states. Therefore, in the study of running situations of complex nonlinear financial system, we can take use of phase space reconstruction to recover the characteristics and nature of real financial system in its phase space. That makes it possible and conveniently to study financial chaos during the running of complex real financial system.This paper studies the nature and characteristics of financial system through phase space of financial system which is based on phase space reconstruction technology. We study financial chaos from its formation, identification, control and early warning through comprehensive and deep analysis, and get some results and conclusions with theoretical breakthrough and practical innovative:(1) The prerequisites and mechanisms for the formation of financial chaos were deeply analyzed. The openness and nonlinearity of financial system make it become an open complex nonlinear system. The interaction of various factors within this system makes it possible for the formation of financial chaos.In this open, complex nonlinear financial system, the formation of chaos was mainly due to the interaction of three factors: inherent defects in the financial market, excessive proliferation of financial innovation and the lack of effective financial supervision. Therefore, in order to avoid and control financial chaos and maintain financial system stable and order operation, we should take measures from these three ways.(2) With the methods of the largest Lyapunov exponent and correlation dimension, financial chaos was identified from different perspectives. And an empirical study was done with China financial system after the current round of global financial crisis, which is the most serious financial chaos throughout the world financ history. The empiric results consistently show that: under the influence of the global financial crisis, China financial appeared deterministic instability and strong chaos during its operation. It further explains the abnormal phenomena of sharp volatility of China financial system during this period.(3) Using related theories of complex nonlinear dynamic science, we construct Logistic models to analysis the stability of financial system and make numerical simulation of the models. We find that:â‘ when the financial supervision lagged behind financial innovation, the financial chaos may arise in financial system;â‘¡financial supervision can effectively prevent and control the financial chaos, and maintain financial system stable and order operation;â‘¢in order to avoid financial chaos and maintain financial system stable and order operation, we must maintain dynamic coordination between financial innovation and financial supervision. With China banking subsystem after the global financial crisis, we empirically test the correctness of models and the effectiveness of supervision and innovation in China banking subsystem.(4) We construct a radial basis function (RBF) neural network model to analysis the early warning of financial chaos. By empirical analysis of U.S. financial system and Chinese financial system, we test the feasibility and correctness of theoretical model. Comparing the characteristic quantities of chaos of U.S. financial system and China financial system, we find that chaos characteristics of U.S. financial system are larger than these in China financial system. That shows there will be more serious financial chaos in America than in China. These empirical results are coincided with the objective fact constantly emerging after August 9, 2007, and further verify the correctness of theoretical models.(5) Considering the current situation of China financial system's development and operation, we put forward some policy recommendations to effectively prevent and defuse financial chaos and to maintain stable and order operation of financial system. These policy recommendations include regulating financial innovation, optimizing financial regulation and improving financial infrastructure. For optimizing financial regulation, we should strengthen macro-prudential supervision, cross-functional coordination and cross-border cooperation, and improve disclosure of information, market discipline, and regulatory innovation to adapt to market changes. For regulating financial innovation, we proposed that financial innovation should be based on the real economy and serve it, improve the transparency of innovative products, grasp the right balance between innovation and risk controls. For improving financial basal construction, we should renovate and improve the payment and settlement system, optimize social credit environment, establish and improve the financial legal system, and promote the effective implementation of new accounting standards.