Applications of linear ordinary differential equations and dynamic system to economics - an example of Taiwan stock index TAIEX
by Nien-Ping Chen; Meng-Rong Li; Tsung-Jui Chiang-Lin; Young-Shiuan Lee; Daniel Wei-Chung Miao
International Journal of Dynamical Systems and Differential Equations (IJDSDE), Vol. 7, No. 2, 2017

Abstract: Mean reversion of stock price is an observed phenomenon in finance. It is similar to the concept of Newton's law of cooling. Three models of ordinary differential equation are derived from the concept and solved by dynamic integration. The models are applied to the daily closing price of Taiwan Stock Exchange Capitalisation Weighted Stock Index. Empirical study shows that the models have good fits and forecasts although errors appear during the dynamic forecasting process. The applicability of the models and future modification are also discussed.

Online publication date: Tue, 01-Aug-2017

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