Martingales, nonlinearity, and chaos

In this article we provide a review of the literature with respect to the efficient markets hypothesis and chaos. In doing so, we contrast the martingale behavior of asset prices to nonlinear chaotic dynamics, discuss some recent techniques used in distinguishing between probabilistic and deterministic behavior in asset prices, and report some evidence. Moreover, we look at the controversies that have arisen about the available tests and results, and raise the issue of whether dynamical systems theory is practical in finance. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: C22; G14.