Long-Range Dependence in Daily Return Stock Market Series
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We reexamined the independence assumption for common stock returns, which is present in standard finance models. We used a relatively broad sample of 2560 observations consisting of a mixture of 27 stock market indices and 1757 individual firms traded in the U.S. stock market.
The efficient market hypothesis continues to provide a widely accepted conceptual framework for the description of capital market behavior. The normal probability distribution assumptions of asset returns and random walk (RW) in asset prices are routinely applied for the sake of simplicity. Unfortunately, for investors and portfolio managers, the real asset return series seem to diverge from theoretical expectations of the well-behaved data generating processes. The empirical return series exhibit some sort of misbehavior. The tails of the probability distribution are too long and large changes in magnitude are too frequent. Furthermore, the data-generating processes seem to have some kind of memory embedded in...
JEL ClassificationC10 G10
Financial support was provided by the Internal Grant Agency of the Faculty of Economics and Management, Czech University of Life Sciences Prague, Kamýcká 129, 165 21, Prague 6 - Suchdol, Czech Republic (grant number 20171007).