Log-Normal continuous cascades: aggregation properties and estimation. Application to financial time-series

E. Bacry, A. Kozhemyak and J. -F. Muzy

Papers from arXiv.org

Abstract: Log-normal continuous random cascades form a class of multifractal processes that has already been successfully used in various fields. Several statistical issues related to this model are studied. We first make a quick but extensive review of their main properties and show that most of these properties can be analytically studied. We then develop an approximation theory of these processes in the limit of small intermittency $\lambda^2\ll 1$, i.e., when the degree of multifractality is small. This allows us to prove that the probability distributions associated with these processes possess some very simple aggregation properties accross time scales. Such a control of the process properties at different time scales, allows us to address the problem of parameter estimation. We show that one has to distinguish two different asymptotic regimes: the first one, referred to as the ''low frequency regime'', corresponds to taking a sample whose overall size increases whereas the second one, referred to as the ''high frequency regime'', corresponds to sampling the process at an increasing sampling rate. We show that, the first regime leads to convergent estimators whereas, in the high frequency regime, the situation is much more intricate : only the intermittency coefficient $\lambda^2$ can be estimated using a consistent estimator. However, we show that, in practical situations, one can detect the nature of the asymptotic regime (low frequency versus high frequency) and consequently decide whether the estimations of the other parameters are reliable or not. We finally illustrate how both our results on parameter estimation and on aggregation properties, allow one to successfully use these models for modelization and prediction of financial time series.

Date: 2008-04
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