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A Monte Carlo simulation to the performance of the R/S and V/S methods—Statistical revisit and real world application

Ling-Yun He and Wen-Bin Qian

Physica A: Statistical Mechanics and its Applications, 2012, vol. 391, issue 14, 3770-3782

Abstract: A correct or precise estimation of the Hurst exponent is one of the fundamentally important problems in the financial economics literature. There are three widely used tools to estimate the Hurst exponent, the canonical rescaled range (R/S), the variance rescaled statistic (V/S) and the Modified rescaled range (Modified R/S). To clarify their performance, we compare them by Monte Carlo simulations; we generate many time-series of a fractal Brownian motion, of a Weierstrass–Mandelbrot cosine fractal function and of a fractionally integrated process, whose theoretical Hurst exponents are known, to compare the Hurst exponents estimated by the three methods. To better understand their pragmatic performance, we further apply all of these methods empirically in real-world applications. Our results imply it is not appropriate to conclude simply which method is better as V/S performs better when the analyzed market is anti-persistent while R/S seems to be a reliable tool used in persistent market.

Keywords: Monte Carlo simulations; Hurst exponent; R/S; V/S; Modified R/S; Fractal Brownian motion; Weierstrass function; Fractionally integrated process (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1016/j.physa.2012.02.028

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Handle: RePEc:eee:phsmap:v:391:y:2012:i:14:p:3770-3782