Long-term memory in stock market prices. (English) Zbl 0781.90023

Lo, Andrew W.

Econometrica 59, No. 5, 1279-1313 (1991).

Summary: A test for long-run memory that is robust to short-range dependence is developed. It is an extension of the “range over standard deviation” of \(R/S\) statistic, for which the relevant asymptotic sampling theory is derived via functional central limit theory. This test is applied to daily and monthly stock returns indexes over several time periods and, contrary to previous findings, there is no evidence of long-range dependence in any of the indexes over any sample period or sub-period once short-range dependence is taken into account. Illustrative Monte Carlo experiments indicate that the modified \(R/S\) test has power against at least two specific models of long-run memory, suggesting that stochastic models of short-range dependence may adequately capture the time series behavior of stock returns.

MSC:

91B84	Economic time series analysis
62P20	Applications of statistics to economics

Keywords:

long-range dependence; fractional differencing; random walk; stock market prices; daily and monthly stock returns indexes; Monte Carlo experiments; \(R/S\) test