On long memory behaviour and predictability of financial markets
AbstractAn immediate consequence of the Efficient Market Hypothesis (EMH) is the absence of auto-correlation of the return series of the financial prices and the exclusion of excess profitability made by any (active) trading strategy. However, the precondition for the validity of EMH, which assumes that all market participants can promptly receive and rationally react to the relevant information affecting the prices, might be (approximately) true for a long time horizon, but not for a short time horizon. By examining local long-range dependence (measured by the rolling Rescaled Range estimates of the Hurst index) of an empirical example, the local market inefficiency is inferred, and excess profitability of a simple trend-following trading strategies implies the potential for constructing a more profitable trading system by incorporating the former into the latter.
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Bibliographic InfoPaper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 3361.
Date of creation: 2014
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Hurst index; Long memory; Market efficiency; Rescaled range analysis; Trading system; High-frequency trading;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-05-24 (All new papers)
- .html">NEP-MST-"> (Market Microstructure)
- NEP-MST-2014-05-24 (Market Microstructure)
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