McCauley, Joseph L. and Gunaratne, Gemunu H. and Bassler, Kevin E. (2006): Hurst exponents, Markov processes, and fractional Brownian motion. Forthcoming in: Physica A (2007)

PDF
MPRA_paper_2154.pdf Download (973kB)  Preview 
Abstract
There is much confusion in the literature over Hurst exponents. Recently, we took a step in the direction of eliminating some of the confusion. One purpose of this paper is to illustrate the difference between fBm on the one hand and Gaussian Markov processes where H≠1/2 on the other. The difference lies in the increments, which are stationary and correlated in one case and nonstationary and uncorrelated in the other. The two and onepoint densities of fBm are constructed explicitly. The twopoint density doesn’t scale. The onepoint density for a semiinfinite time interval is identical to that for a scaling Gaussian Markov process with H≠1/2 over a finite time interval. We conclude that both Hurst exponents and one point densities are inadequate for deducing the underlying dynamics from empirical data. We apply these conclusions in the end to make a focused statement about ‘nonlinear diffusion’.
Item Type:  MPRA Paper 

Institution:  University of Houston 
Original Title:  Hurst exponents, Markov processes, and fractional Brownian motion 
Language:  English 
Keywords:  Markov processes; fractional Brownian motion; scaling; Hurst exponents; stationary and nonstationary increments; autocorrelations 
Subjects:  G  Financial Economics > G0  General > G00  General C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General 
Item ID:  2154 
Depositing User:  Joseph L. McCauley 
Date Deposited:  09 Mar 2007 
Last Modified:  28 Sep 2019 07:02 
References:  1. P. Embrechts and M. Maejima, Selfsimilar Processes, Princeton University Press, Princeton, 2002. 2.B. Mandelbrot & J. W. van Ness, SIAM Rev. 10, 2, 422,1968. 3. B. Mandelbrot, Fractals and Scaling in Finance, Springer, N.Y., 1997. 4. J.L. McCauley, Dynamics of Markets: Econophysics and Finance, Cambridge, Cambridge, 2004. 5. T. Di Matteo, T.Aste, & M.M. Dacorogna, Physica A324, 183, 2003. 6. K.E. Bassler, G.H. Gunaratne, & J. L. McCauley, Hurst Exponents, Markov Processes, and Nonlinear Diffusion Equations, Physica A369, 343, 2006. 7. K.E. Bassler, J. L. McCauley, & G.H. Gunaratne, Nonstationary Increments, Scaling Distributions, and Variable Diffusion Processes in Financial Markets, 2006. 8. E. Scalas, R. Gorenflo and F. Mainardi, Physica A284, 376, 2000. 9. F. Mainardi, M. Raberto, R. Gorenflo and E. Scalas Physica A 287, 468, 2000. 10. R.L. Stratonovich. Topics in the Theory of Random Noise, Gordon & Breach: N.Y., tr. R. A. Silverman, 1963. 11.See the article by Wang & Uhlenbeck in N. Wax. Selected Papers on Noise and Stochastic Processes. Dover: N.Y., 1954. 12. R. Durrett, Brownian Motion and Martingales in Analysis, Wadsworth, Belmont, 1984. 13. G.H. Gunaratne & J.L. McCauley. Proc. of SPIE conf. on Noise & Fluctuations 2005, 5848,131, 2005. 14. A. L. AlejandroQuinones, K.E. Bassler, M. Field, J.L. McCauley, M. Nicol, I. Timofeyev, A. Török, and G.H. Gunaratne, Physica 363A, 383, 2006. 15. P. Hänggi & H. Thomas, Physics Reports 88, 207, 1982. 16. L. Borland, Quantitative Finance 2, 415, 2002. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/2154 