Study On Financial Market Risk From Nonlinear Perspective

With the development of financial market and the abundance of financial tools, the fluctuation of financial marker is aggregating. This trend makes investors pay more attention to the risk problem. However, the guide provided by the classical financial theory didn't work well in many occasions. It cannot meet the demand in the course of practically used. Sometimes, it even brings the disaster. Maybe the fault of LTCM is the best example. Looking for the reasons carefully, we can find the real reason behind the fact is that the classical finance theory is a kind of linearly analysis which is based on EMH. It assumed that all investors are completely rational; the market is efficient and the distribution of the profit is normal. This kind of assumptions imply that all investor' s reaction to the information is linear, in other words, when the information come up, all investors take the uniform action and the according the result can be got immediately. Above all constitute the financial study' s linear paradigm. It has brought us a lot of conveniences to model the theory, and produce a series of fruits. However, it is different with the reality take place in our market, so it doomed to fail.The recent reaches have shown that the financial market is a complex system, naturally it is nonlinear. The bias is inevitable if we use linearly approach to study it. Owing to the continuing development of nonlinear science, the scholars gradually got free from the constraint of the linear method; introduced the nonlinear method into the financial research and achieved a series of breakthroughs. Behavioral finance theory and fractal theory are new exploration under the nonlinear paradigm. They made a great of contributions to the study of financial market risk. Comparing with the traditional approach, we gradually reach such common: the study under the nonlinear paradigm is more meaningful.From nonlinear paradigm perspective, the delicate and brittle assumption have been abandoned, the way of the investors' actions are more near to the reality, so it can reflect the truth more correctly and get more reliable conclusion. Behavioral finance theory and fractal market theory are representative theories under nonlinear paradigm. They proved that the finance market is nonlinear from the investor and financial darns' perspective respectively. They answered the question why the financial market are always fluctuating and accordingly provided the method to control the risk. Although, there are some drawbacks in them, their prospects are promising. We believe, with the extension of research under the nonlinear paradigm. We can achieve more concrete fruits and have a clear picture about the financial market risk. Eventually, we can control the risk more correctly in practice.