DETECTING MULTIFRACTAL PROPERTIES IN ASSET RETURNS: THE FAILURE OF THE "SCALING ESTIMATOR"

Thomas Lux ()
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Thomas Lux: Department of Economics, University of Kiel, Olshausenstr. 40, 24118 Kiel, Germany

International Journal of Modern Physics C (IJMPC), 2004, vol. 15, issue 04, 481-491

Abstract: It has become popular recently to apply the multifractal formalism of statistical physics (scaling analysis of structure functions andf(α)singularity spectrum analysis) to financial data. The outcome of such studies is a nonlinear shape of the structure function and a nontrivial behavior of the spectrum. Eventually, this literature has moved from basic data analysis to estimation of particular variants of multifractal models for asset returns via fitting of the empiricalτ(q)andf(α)functions. Here, we reinvestigate earlier claims of multifractality using four long time series of important financial markets. Taking the recently proposed multifractal models of asset returns as our starting point, we show that the typical "scaling estimators" used in the physics literature are unable to distinguish between spurious and "true" multiscaling of financial data. Designing explicit tests for multiscaling, we can in no case reject the null hypothesis that the apparent curvature of both the scaling function and the Hölder spectrum are spuriously generated by the particular fat-tailed distribution of financial data. Given the well-known overwhelming evidence in favor of different degrees of long-term dependence in the powers of returns, we interpret this inability to reject the null hypothesis of multiscaling as a lack of discriminatory power of the standard approach rather than as a true rejection of multiscaling. However, the complete "failure" of the multifractal apparatus in this setting also raises the question whether results in other areas (like geophysics) suffer from similar shortcomings of the traditional methodology.

Keywords: Multifractality; scaling estimator; asset returns; bootstrapping; 05.45.-a; 89.65.-r; 89.65.-s (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (15)

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DOI: 10.1142/S0129183104005887

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