Long Memory and Fractality Among Global Equity Markets: a Multivariate Wavelet Approach
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Long Memory and Fractality Among Global Equity Markets: a Multivariate Wavelet Approach Avishek Bhandari1 · Bandi Kamaiah2 Accepted: 30 September 2020 © The Indian Econometric Society 2020
Abstract This paper seeks to understand the long memory behaviour of global equity returns using novel methods from wavelet analysis. We implement the wavelet based multivariate long memory approach, which possibly is the first application of wavelet based multivariate long memory technique in finance and economics. In doing so, long-run correlation structures among global equity returns are captured within the framework of wavelet-multivariate long memory methods, enabling one to analyze the long-run correlation among several markets exhibiting both similar and dissimilar fractal structures. Keywords Long memory · Fractal connectivity · Wavelets · Hurst exponent JEL Classification C13 · C14 · C22 · C32 · G15
Introduction Estimation and the analysis of long memory parameters have mainly focused on the analysis of long-range dependence in stock return volatility using traditional time and spectral domain estimators of long memory. The presence of long memory requires major revisions in the standard estimation procedures without which the estimated results can be seriously biased. In this paper on long memory among global equity markets, several wavelet-based estimators are applied to test for presence of long memory in global equity returns and also returns volatility. The presence of long memory in volatility of stock returns as well as some returns themselves * Avishek Bhandari [email protected] Bandi Kamaiah [email protected] 1
Department of General Management, Institute of Management Technology, No. 38, Cherlaguda Village, Shamshabad Mandal, RR District, Hyderabad 501218, India
2
School of Management Studies, University of Hyderabad, Hyderabad 500046, India
13
Vol.:(0123456789)
Journal of Quantitative Economics
is demonstrated from the empirical evidences. Furthermore, phases of efficiency and inefficiency of markets, as adjudicated by presence of both long memory and no-memory, is evidenced when the analysis is performed using rolling windows. Existence or absence of long memory in stock returns may be used to determine the stage of market development in terms of efficiency and inefficiency. According to the weak-form version of the Efficient Market Hypothesis (EMH), equity prices contain all available information about equity price, acquired from past trading. This suggests that prediction of prices, when the EMH hold, is not possible. On the other hand, presence of long-memory in equity returns and volatility implies that distant observations in the equity returns and volatility series are related to each other. This implication leads to rejection of efficient markets as presence of long-range dependence is incompatible with the basic tenets of efficient market hypothesis (EMH). The analysis of long memory is further extended to estimate long-run correlation matrix of global equity returns
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