On Long Memory Behaviour and Predictability of Financial Markets

Long Hai Vo, Leigh Roberts

Research output: Contribution to specialist publicationArticle in specialist publication

Abstract

An immediate consequence of the Efficient Market Hypothesis (EMH) is the absence of auto-correlation of the return series of the financial prices and the exclusion of excess profitability made by any (active) trading strategy. However, the precondition for the validity of EMH, which assumes that all market participants can promptly receive and rationally react to the relevant information affecting the prices, might be (approximately) true for a long time horizon, but not for a short time horizon. By examining local long-range dependence (measured by the rolling Rescaled Range estimates of the Hurst index) of an empirical example, the local market inefficiency is inferred, and excess profitability of a simple trend-following trading strategy is observed. Moreover, the significant positive cross-correlation between the local Hurst index estimates and the returns of the trend-following trading strategies implies the potential for constructing a more profitable trading system by incorporating the former into the latter.
Original languageEnglish
Number of pages33
Specialist publicationSSRN Electronic Journal
DOIs
Publication statusPublished - 16 May 2017

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  • New Zealand-ASEAN Scholar Award

    Vo, Long (Recipient), Nov 2011

    Prize: Postgraduate Scholarship

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