Abstract
We estimated Hurst exponent of twelve stock index series from across the glove using daily values of for past ten years and found that the Hurst exponent value of the full series is around 0.50 confirming market efficiency. But the Hurst exponent value is found to vary widely when the full series is split into smaller series of 60 trading days. Later, we tried to find relationship between Hurst exponent value and profitable trading opportunity from these smaller series and found that periods displaying high Hurst exponent have potential to yield better trading profits from a moving average trading rule.
Highlights
In this paper, we empirically examined the relationships between Hurst exponent and the predictability of financial time series
Security prices follow random walks and returns from financial securities are unpredictable. This theory is popularly referred as Random Walk Hypothesis (RWH) and represents one of the variants of the broader Efficient Market Hypothesis (EMH)
Based on influence of information in stock prices, the EMH can be divided into three types: weak form, semi strong form and strong form
Summary
We empirically examined the relationships between Hurst exponent and the predictability of financial time series. Security prices follow random walks and returns from financial securities are unpredictable. This theory is popularly referred as Random Walk Hypothesis (RWH) and represents one of the variants of the broader Efficient Market Hypothesis (EMH). The implication of the weak-form EMH is that security prices follow random walks and cannot be predicted from analysis of past prices. In line with analysis of trends in physical science domain, financial analysts have tried to detect trends in financial time series that seemingly look random. This type of analysis to detect trend based on analysis of past prices are classified as “Technical Analysis” and many mathematical and graphical techniques are proposed. In this paper we compared the relationship between Hurst exponent and predictability of selected financial series
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