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On long memory behaviour and predictability of financial markets

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  • Vo, Long H.
  • Roberts, Leigh

Abstract

An 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.

Suggested Citation

  • Vo, Long H. & Roberts, Leigh, 2014. "On long memory behaviour and predictability of financial markets," Working Paper Series 3361, Victoria University of Wellington, School of Economics and Finance.
  • Handle: RePEc:vuw:vuwecf:3361
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    File URL: http://researcharchive.vuw.ac.nz/handle/10063/3361
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    References listed on IDEAS

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    1. Malliaropulos, Dimitrios & Priestley, Richard, 1999. "Mean reversion in Southeast Asian stock markets," Journal of Empirical Finance, Elsevier, vol. 6(4), pages 355-384, October.
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    7. Bollerslev, Tim & Wright, Jonathan H., 2000. "Semiparametric estimation of long-memory volatility dependencies: The role of high-frequency data," Journal of Econometrics, Elsevier, vol. 98(1), pages 81-106, September.
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    9. B. Mandelbrot, 1972. "Statistical Methodology for Nonperiodic Cycles: From the Covariance To R/S Analysis," NBER Chapters,in: Annals of Economic and Social Measurement, Volume 1, number 3, pages 259-290 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Roberts, Leigh A., 2015. "Distribution free testing of goodness of fit in a one dimensional parameter space," Statistics & Probability Letters, Elsevier, vol. 99(C), pages 215-222.

    More about this item

    Keywords

    Hurst index; Long memory; Market efficiency; Rescaled range analysis; Trading system; High-frequency trading;

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