Long range dependence in stock market returns

Christos Christodoulou-Volos and Fotios Siokis

Applied Financial Economics, 2006, vol. 16, issue 18, 1331-1338

Abstract: Many authors have investigated the possibility of long-range dependence, or long memory, in asset returns, but very little evidence has been found for long memory in either stock or exchange rate returns. This paper examines the presence of long-range dependence in a sample of 34 stock index returns using the semiparametric methods suggested by Geweke and Porter-Hudak (1983) and Robinson (1995). The results provide significant and robust evidence of fractional dynamics in most major and small stock markets over the sample periods. Depending on the test used, statistically significant long memory is detected in approximately 65% of the series. It appears that most stock returns are long-term dependent, suggesting stock market inefficiency and a high degree of predictability.

Date: 2006
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DOI: 10.1080/09603100600829519

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