Long-Term Memory in Stock Market Prices
Andrew W Lo
Econometrica , 59:1279-1313 (1991)
Abstract
A test for long-run memory that is robust to
short-range dependence is developed. It is an
extension of the "range over standard deviation"
or R/S statistic, for which the relevant
asymptotic sampling theory is derived via
functional central limit theory. This test is
applied to daily and monthly stock returns
indexed over several time periods and, contrary
to previous findings, there is no evidence of
long-range dependence in any of the indexes
over any sample period or sub-period once
short-range dependence is taken into account.
Illustrative Monte Carlo experiments indicate
that the modified R/S test has power against at
least two specific models of long-run memory,
suggesting that stochastic models of
short-range dependence may adequately
capture the time series behavior of stock
returns.
