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Distinguishing between short and long range dependence: Finite sample properties of rescaled range and modified rescaled range

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  • G14 - Information And Market Efficiency
  • Event Studies
  • G10 - General
  • C49 - Other
  • C01 - Econometrics


Mostly used estimators of Hurst exponent for detection of long-range dependence are biased by presence of short-range dependence in the underlying time series. We present confidence intervals estimates for rescaled range and modified rescaled range. We show that the difference in expected values and confidence intervals enables us to use both methods together to clearly distinguish between the two types of processes. The estimates are further applied on Dow Jones Industrial Average between 1944 and 2009 and show that returns do not show any long-range dependence whereas volatility shows both short-range and long-range dependence in the underlying process.

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