Markov processes, Hurst exponents, and nonlinear diffusion equations: With application to finance

Kevin E. Bassler, Gemunu H. Gunaratne and Joseph L. McCauley

Physica A: Statistical Mechanics and its Applications, 2006, vol. 369, issue 2, 343-353

Abstract: We show by explicit closed form calculations that a Hurst exponent H≠12 does not necessarily imply long time correlations like those found in fractional Brownian motion (fBm). We construct a large set of scaling solutions of Fokker–Planck partial differential equations (pdes) where H≠12. Thus Markov processes, which by construction have no long time correlations, can have H≠12. If a Markov process scales with Hurst exponent H≠12 then it simply means that the process has nonstationary increments. For the scaling solutions, we show how to reduce the calculation of the probability density to a single integration once the diffusion coefficient D(x,t) is specified. As an example, we generate a class of student-t-like densities from the class of quadratic diffusion coefficients. Notably, the Tsallis density is one member of that large class. The Tsallis density is usually thought to result from a nonlinear diffusion equation, but instead we explicitly show that it follows from a Markov process generated by a linear Fokker–Planck equation, and therefore from a corresponding Langevin equation. Having a Tsallis density with H≠12 therefore does not imply dynamics with correlated signals, e.g., like those of fBm. A short review of the requirements for fBm is given for clarity, and we explain why the usual simple argument that H≠12 implies correlations fails for Markov processes with scaling solutions. Finally, we discuss the question of scaling of the full Green function g(x,t;x′,t′) of the Fokker–Planck pdes.

Keywords: Hurst exponent; Markov process; Scaling; Stochastic calculus; Autocorrelations; Fractional Brownian motion; Tsallis model; Nonlinear diffusion (search for similar items in EconPapers)
Date: 2006
References: View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:369:y:2006:i:2:p:343-353

DOI: 10.1016/j.physa.2006.01.081

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