Applications of Parameterized Nonlinear Ordinary Differential Equations and Dynamic Systems: An Example of the Taiwan Stock Index

Abstract

Considering the phenomenon of the mean reversion and the different speeds of stock prices in the bull market and in the bear market, we propose four dynamic models each of which is represented by a parameterized ordinary differential equation in this study. Based on existing studies, the models are in the form of either the logistic growth or the law of Newton’s cooling. We solve the models by dynamic integration and apply them to the daily closing prices of the Taiwan stock index, Taiwan Stock Exchange Capitalization Weighted Stock Index. The empirical study shows that some of the models fit the prices well and the forecasting ability of the best model is acceptable even though the martingale forecasts the prices slightly better. To increase the forecasting ability and to broaden the scope of applications of the dynamic models, we will model the coefficients of the dynamic models in the future. Applying the models to the market without the price limit is also our future work.