A comment on measuring the Hurst exponent of financial time series

Michel Couillard and Matt Davison

Physica A: Statistical Mechanics and its Applications, 2005, vol. 348, issue C, 404-418

Abstract: A fundamental hypothesis of quantitative finance is that stock price variations are independent and can be modeled using Brownian motion. In recent years, it was proposed to use rescaled range analysis and its characteristic value, the Hurst exponent, to test for independence in financial time series. Theoretically, independent time series should be characterized by a Hurst exponent of 1/2. However, finite Brownian motion data sets will always give a value of the Hurst exponent larger than 1/2 and without an appropriate statistical test such a value can mistakenly be interpreted as evidence of long term memory. We obtain a more precise statistical significance test for the Hurst exponent and apply it to real financial data sets. Our empirical analysis shows no long-term memory in some financial returns, suggesting that Brownian motion cannot be rejected as a model for price dynamics.

Keywords: Econophysics; Hurst exponent; R/S analysis; Efficient market hypothesis (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (67)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:348:y:2005:i:c:p:404-418

DOI: 10.1016/j.physa.2004.09.035

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