Economy – Quantitative Finance – Statistical Finance
Scientific paper
2007-10-13
Economy
Quantitative Finance
Statistical Finance
5 figures
Scientific paper
The condition for stationary increments, not scaling, detemines long time pair autocorrelations. An incorrect assumption of stationary increments generates spurious stylized facts, fat tails and a Hurst exponent H_s=1/2, when the increments are nonstationary, as they are in FX markets. The nonstationarity arises from systematic uneveness in noise traders' behavior. Spurious results arise mathematically from using a log increment with a 'sliding window'. We explain why a hard to beat market demands martingale dynamics , and martingales with nonlinear variance generate nonstationary increments. The nonstationarity is exhibited directly for Euro/Dollar FX data. We observe that the Hurst exponent H_s generated by the using the sliding window technique on a time series plays the same role as does Mandelbrot's Joseph exponent. Finally, Mandelbrot originally assumed that the 'badly behaved' second moment of cotton returns is due to fat tails, but that nonconvergent behavior is instead direct evidence for nonstationary increments. Summarizing, the evidence for scaling and fat tails as the basis for econophysics and financial economics is provided neither by FX markets nor by cotton price data.
Bassler Kevin E.
Gunaratne Gemunu H.
McCauley Joseph L.
No associations
LandOfFree
Martingales, the Efficient Market Hypothesis, and Spurious Stylized Facts does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with Martingales, the Efficient Market Hypothesis, and Spurious Stylized Facts, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Martingales, the Efficient Market Hypothesis, and Spurious Stylized Facts will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-724130