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ARCH and GARCH models vs. martingale volatility of finance market returns

  • McCauley, Joseph L.
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    ARCH and GARCH models assume either i.i.d. or 'white noise' as is usual in regression analysis, while also assuming memory in a conditional mean square fluctuation with stationary increments. We will show that ARCH/GARCH is inconsistent with uncorrelated increments, violating the i.i.d. and 'white' assumptions, and violating finance data and the efficient market hypothesis as well.

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    File URL: http://www.sciencedirect.com/science/article/B6W4W-4WGF17G-1/2/c3c505ae4c7adb538dffd3facec5377f
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    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 18 (2009)
    Issue (Month): 4 (September)
    Pages: 151-153

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    Handle: RePEc:eee:finana:v:18:y:2009:i:4:p:151-153
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620166

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    1. Katarina Juselius & Ronald MacDonald, 2000. "International Parity Relationships between Germany and the United States: A Joint Modelling Approach," Discussion Papers 00-10, University of Copenhagen. Department of Economics.
    2. Bassler, Kevin E. & McCauley, Joseph L. & Gunaratne, Gemunu H., 2006. "Nonstationary increments, scaling distributions, and variable diffusion processes in financial markets," MPRA Paper 2126, University Library of Munich, Germany.
    3. McCauley, Joseph L. & Bassler, Kevin E. & Gunaratne, Gemunu H., 2008. "Martingales, detrending data, and the efficient market hypothesis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(1), pages 202-216.
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