Why the long-term auto-correlation has not been eliminated by arbitragers: Evidences from NYMEX

Daye Li, Yusaku Nishimura and Ming Men

Energy Economics, 2016, vol. 59, issue C, 167-178

Abstract: The efficient market hypothesis claims that market prices follow the random walk and that any predictable trend will be eliminated by arbitragers in a short period of time. However, the fractal market hypothesis disagrees, asserting that long-term memory can persist in the market. To understand why this conflict exists, we propose a method to explore the long-term market trend using the local Hurst exponent and seek to obtain the extra yield. Performance is evaluated by using both a simulation and the high frequency 5-min data and the daily data. The result indicates that the model performs well with the uni-fractal series in the simulation. However, the model shows limited predictive abilities with the data from the real market due to the multi-fractal characteristics. Although the long-term trends persist in the markets and can be identified with statistical significance, traders cannot beat the market because of the time-varying feature and because the strength of long-term memory is not strong enough to cover the transaction costs. The result reconciles the long-term auto-correlations with EMH in a quantitative manner.

Keywords: Hurst exponent; Long-term trend; Fractal Brownian motion; Momentum strategy (search for similar items in EconPapers)
JEL-codes: C14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:59:y:2016:i:c:p:167-178

DOI: 10.1016/j.eneco.2016.08.006

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