Mixed fractional Brownian motion, short and long-term Dependence and economic conditions: the case of the S&P-500 Index

Dominique, C-René and Rivera-Solis, Luis Eduardo (2011): Mixed fractional Brownian motion, short and long-term Dependence and economic conditions: the case of the S&P-500 Index. Forthcoming in: International Business and Management , Vol. Vol.3, No. No.2 (30 November 2011): pp. 1-13.

Abstract

The Kolmogorov-Mandelbrot-van Ness Process is a zero mean Gaussian process indexed by the Hurst Parameter (H). When it models financial data, a controversy arises as to whether or not financial data exhibit short or long-range dependence. This paper argues that the Mixed Fractional Brownian is a more suitable tool for the purpose as it leaves no room for controversy. It is used here to model the S&P-500 Index, sampled daily over the period 1950-2011. The main results are as follows: The S&P-500 Index is characterized by both short and long-term dependence. More explicitly, it is characterized by at least 12 distinct scaling pa-rameters that are, ex hypothesis, determined by investors’ approach to the market. When the market is dominated by “blue-chippers” or ‘long-termists’, or when bubbles are ongoing, the index is persistent; and when the market is dominated by “con-trarians”, the index jumps to anti-persistence that is a far-from-equilibrium state in which market crashes are likely to occur.

• Item Type: MPRA Paper
• Language: English
• Keywords: Gaussian Processes; Mixed Fractional Brownian Motion; Hurst Exponent; Local Self-similarity, Persistence; Anti-persistence; Definiteness of covariance Functions; Dissipative dynamic systems
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets; ; C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods

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