Testing for long-range dependence in world stock markets

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Cajueiro, Daniel Oliveira ; Tabak, Benjamin Miranda (2008)

In this paper, we show a novel approach to rank stock market indices in terms of weak form efficiency using state of the art methodology in statistical physics. We employ the R/S and V/S methodologies to test for long-range dependence in equity returns and volatility. Empirical results suggests that although emerging markets possess stronger long-range dependence in equity returns than developed economies, this is not true for volatility. In the case of volatility, Hurst exponents are substantially high for both classes of countries, which indicates that traditional option prices such as the Black and Scholes model are misspecified. These findings have important implications for both portfolio and risk management.
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