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Multifractality In Asset Returns: Theory And Evidence

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  • Laurent Calvet
  • Adlai Fisher

Abstract

This paper investigates the multifractal model of asset returns (MMAR), a class of continuous-time processes that incorporate the thick tails and volatility persistence exhibited by many financial time series. The simplest version of the MMAR compounds a Brownian motion with a multifractal time-deformation. Prices follow a semi-martingale, which precludes arbitrage in a standard two-asset economy. Volatility has long memory, and the highest finite moments of returns can take any value greater than 2. The local variability of a sample path is highly heterogeneous and is usefully characterized by the local Hölder exponent at every instant. In contrast with earlier processes, this exponent takes a continuum of values in any time interval. The MMAR predicts that the moments of returns vary as a power law of the time horizon. We confirm this property for Deutsche mark/U.S. dollar exchange rates and several equity series. We develop an estimation procedure and infer a parsimonious generating mechanism for the exchange rate. In Monte Carlo simulations, the estimated multifractal process replicates the scaling properties of the data and compares favorably with some alternative specifications. © 2002 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 84 (2002)
Issue (Month): 3 (August)
Pages: 381-406

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Handle: RePEc:tpr:restat:v:84:y:2002:i:3:p:381-406

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