Parameter Estimation for Dynamic Model of the Financial System

Abstract

Economy can be considered a large, open system which is infl uenced by fl uctuations, both internal and external. Based on non-linear dynamics theory, the dynamic models of a fi nancial system try to provide a new perspective by explaining the complicated behaviour of the system not as a result of external infl uences or random behaviour, but as a result of the behaviour and trends of the system's internal structures. The present article analyses a chaotic fi nancial system from the point of view of determining the time delay of the model variables -the interest rate, investment demand, and price index. The theory is briefl y explained in the fi rst chapters of the paper and serves as a basis for formulating the relations. This article aims to determine the appropriate length of time delay variables in a dynamic model of the fi nancial system in order to express the real economic situation and respect the eff ect of the history of factors under consideration. The determination of the delay length is carried out for the time series representing Euro area. The methodology for the determination of the time delay is illustrated by a concrete example.