Chaos Theory and Financial Markets: A Systematic Review of Crisis and Bubbles

Abstract

Financial markets have been characterized by various financial crises and unpredictable fluctuations and price movements. While traditional finance theories, which assume that financial markets are composed of rational participants, fail to explain the market dynamics that cause crises, chaos theory provides a powerful framework to make sense of the unpredictable, deterministic nature of markets. Chaos theory claims that market fluctuations are not random but have a specific mathematical pattern.This study presents a systematic literature review addressing the relationship between chaos theory and financial crises and speculative bubbles. By analyzing articles from the Web of Science database, its relationship with crisis and bubble dynamics, and the main methodological approaches. This study explores the effectiveness of chaos theory in understanding financial instability in the context of financial crises and bubbles by examining the research questions identified for the application of chaos theory in finance through Preferred Reporting Items for Systematic Reviews and Meta-Analyses methodology and keyword analysis.