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Long-Term Memory in Stock Market Prices

Andrew W. Lo
Econometrica
Vol. 59, No. 5 (Sep., 1991), pp. 1279-1313
Published by: The Econometric Society
DOI: 10.2307/2938368
Stable URL: http://www.jstor.org/stable/2938368
Page Count: 35
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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 indexes 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.

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