Mastering Python for Finance - Second Edition

Examples of nonlinear models

Many nonlinear models have been proposed for academic and applied research to explain certain aspects of economic and financial data that are left unexplained by linear models. The literature on nonlinearity in finance is simply too broad and deep to be adequately explained in this book. In this section, we will briefly discuss some examples of nonlinear models that we may come across for practical uses: the implied volatility model, Markov switching model, threshold model, and smooth transition model.