Empirical evidence of long-range correlations in stock returns

Abstract

A major issue in financial economics is the behaviour of stock returns over long horizons. This study provides empirical evidence of the long-range behaviour of various speculative returns. Using different techniques such as R/S and modified R/S analysis, detrended fluctuation analysis (DFA), fractional differencing test (GPH) and ARFIMA maximum likelihood estimation, we find little evidence of long memory in returns themselves, by strong evidence of persistence in volatility measured as squared returns or absolute returns. These results allow us to conclude that any stock market model should show no temporal dependence in returns and long-range correlation in conditional volatility.