Abstract: From the view of financial complexity,this paper aims at discovering mechanism and nature of volatility in stock prices based on the methodology of nonlinear dynamical analysis. Our research indicates that market volatility exhibits fractal characteristic and long-memory effect. Furthermore,our empirical studies show that capital markets possess an underlying low-dimensional chaotic system and therefore endogenous instability. Our research also indicates that the behavior of stock prices has internal mechanism of nonlinear dynamics,and is the result of positive feedbacks and interactions between heterogeneous investors. Finally,it presents further research guide of nonlinear financial theory and gives a new insight into investment practice.

Key words: financial markets, complexity, nonlinear dynamics, positive feedback, heterogeneity