The Hurst exponent is used as a measure of long-term memory of time series. It relates to the autocorrelations of the time series, and the rate at which these decrease as the lag between pairs of values increases. Studies involving the Hurst exponent were originally developed in hydrology for the practical matter of determining optimum dam sizing for the Nile river's volatile rain and drought conditions that had been observed over a long period of time. The name "Hurst exponent", or "Hurst coefficient", derives from Harold Edwin Hurst (1880–1978), who was the lead researcher in these studies; the use of the standard notation H for the coefficient also relates to his name.
In fractal geometry, the generalized Hurst exponent has been denoted by H or Hq in honor of both Harold Edwin Hurst and Ludwig Otto Hölder (1859–1937) by Benoît Mandelbrot (1924–2010). H is directly related to fractal dimension, D, and is a measure of a data series' "mild" or "wild" randomness.
The Hurst exponent is referred to as the "index of dependence" or "index of long-range dependence". It quantifies the relative tendency of a time series either to regress strongly to the mean or to cluster in a direction. A value H in the range 0.5–1 indicates a time series with long-term positive autocorrelation, meaning both that a high value in the series will probably be followed by another high value and that the values a long time into the future will also tend to be high. A value in the range 0 – 0.5 indicates a time series with long-term switching between high and low values in adjacent pairs, meaning that a single high value will probably be followed by a low value and that the value after that will tend to be high, with this tendency to switch between high and low values lasting a long time into the future. A value of H=0.5 can indicate a completely uncorrelated series, but in fact it is the value applicable to series for which the autocorrelations at small time lags can be positive or negative but where the absolute values of the autocorrelations decay exponentially quickly to zero. This in contrast to the typically power law decay for the 0.5 < H < 1 and 0 < H < 0.5 cases.
- is the range of the first cumulative deviations from the mean, and is their standard deviation
- is the expected value
- is the time span of the observation (number of data points in a time series)
- is a constant.
Relation to Fractal Dimension
For self-similar time series, H is directly related to fractal dimension, D, where 1 < D < 2, such that D = 2 - H. The values of the Hurst exponent vary between 0 and 1, with higher values indicating a smoother trend, less volatility, and less roughness.
For more general time series or multi-dimensional process, the Hurst exponent and fractal dimension can be chosen independently, as the Hurst exponent represents structure over asymptotically longer periods, while fractal dimension represents structure over asymptotically shorter periods.
Estimating the exponent
A number of estimators of long-range dependence have been proposed in the literature. The oldest and best-known is the so-called rescaled range (R/S) analysis popularized by Mandelbrot and Wallis and based on previous hydrological findings of Hurst. Alternatives include DFA, Periodogram regression, aggregated variances, local Whittle's estimator, wavelet analysis, both in the time domain and frequency domain.
Rescaled range (R/S) analysis
To estimate the Hurst exponent, one must first estimate the dependence of the rescaled range on the time span n of observation. A time series of full length N is divided into a number of shorter time series of length n = N, N/2, N/4, ... The average rescaled range is then calculated for each value of n.
1. Calculate the mean;
2. Create a mean-adjusted series;
3. Calculate the cumulative deviate series ;
4. Compute the range ;
5. Compute the standard deviation ;
6. Calculate the rescaled range and average over all the partial time series of length
The Hurst exponent is estimated by fitting the power law to the data. This can be done by plotting as a function of , and fitting a straight line; the slope of the line gives (a more principled approach fits the power law in a maximum-likelihood fashion). Such a graph is called a box plot. However, this approach is known to produce biased estimates of the power-law exponent. For small there is a significant deviation from the 0.5 slope. Anis and Lloyd estimated the theoretical (i.e., for white noise) values of the R/S statistic to be:
where is the Euler gamma function. The Anis-Lloyd corrected R/S Hurst exponent is calculated as 0.5 plus the slope of .
No asymptotic distribution theory has been derived for most of the Hurst exponent estimators so far. However, Weron used bootstrapping to obtain approximate functional forms for confidence intervals of the two most popular methods, i.e., for the Anis-Lloyd corrected R/S analysis:
|Level||Lower bound||Upper bound|
|90%||0.5 − exp(−7.35 log(log M) + 4.06)||exp(−7.07 log(log M) + 3.75) + 0.5|
|95%||0.5 − exp(−7.33 log(log M) + 4.21)||exp(−7.20 log(log M) + 4.04) + 0.5|
|99%||0.5 − exp(−7.19 log(log M) + 4.34)||exp(−7.51 log(log M) + 4.58) + 0.5|
and for DFA:
|Level||Lower bound||Upper bound|
|90%||0.5 − exp(−2.99 log M + 4.45)||exp(−3.09 log M + 4.57) + 0.5|
|95%||0.5 − exp(−2.93 log M + 4.45)||exp(−3.10 log M + 4.77) + 0.5|
|99%||0.5 − exp(−2.67 log M + 4.06)||exp(−3.19 log M + 5.28) + 0.5|
Here and is the series length. In both cases only subseries of length were considered for estimating the Hurst exponent; subseries of smaller length lead to a high variance of the R/S estimates.
The basic Hurst exponent can be related to the expected size of changes, as a function of the lag between observations, as measured by E(|Xt+τ-Xt|2). For the generalized form of the coefficient, the exponent here is replaced by a more general term, denoted by q.
There are a variety of techniques that exist for estimating H, however assessing the accuracy of the estimation can be a complicated issue. Mathematically, in one technique, the Hurst exponent can be estimated such that:
- Hq = H(q),
for a time series
- g(t) (t = 1, 2,...)
may be defined by the scaling properties of its structure functions Sq():
where q > 0, is the time lag and averaging is over the time window
usually the largest time scale of the system.
Practically, in nature, there is no limit to time, and thus H is non-deterministic as it may only be estimated based on the observed data; e.g., the most dramatic daily move upwards ever seen in a stock market index can always be exceeded during some subsequent day.
In the above mathematical estimation technique, the function H(q) contains information about averaged generalized volatilities at scale (only q = 1, 2 are used to define the volatility). In particular, the H1 exponent indicates persistent (H1 > ½) or antipersistent (H1 < ½) behavior of the trend.
For the BRW (brown noise, 1/f²) one gets
- Hq = ½,
and for pink noise (1/f)
- Hq = 0.
- H1Dq = -½ , H2Dq = -1.
- Hq = q/α for q < α and Hq = 1 for q ≥ α.
In the above definition two separate requirements are mixed together as if they would be one. Here are the two independent requirements: (i) stationarity of the increments, x(t+T)-x(t)=x(T)-x(0) in distribution. this is the condition that yields longtime autocorrelations. (ii) Self-similarity of the stochastic process then yields variance scaling, but is not needed for longtime memory. E.g., both Markov processes (i.e., memory-free processes) and fractional Brownian motion scale at the level of 1-point densities (simple averages), but neither scales at the level of pair correlations or, correspondingly, the 2-point probability density.[clarification needed]
An efficient market requires a martingale condition, and unless the variance is linear in the time this produces nonstationary increments, x(t+T)-x(t)≠x(T)-x(0). Martingales are Markovian at the level of pair correlations, meaning that pair correlations cannot be used to beat a martingale market. Stationary increments with nonlinear variance, on the other hand, induce the longtime pair memory of fractional Brownian motion that would make the market beatable at the level of pair correlations. Such a market would necessarily be far from "efficient".
An analysis of economic time series by means of the Hurst exponent using rescaled range and Detrended fluctuation analysis is conducted by econophysicist A.F. Bariviera. This paper studies the time varying character of Long-range dependency and, thus of informational efficiency.
- Matlab code for computing R/S, DFA, periodogram regression and wavelet estimates of the Hurst exponent and their corresponding confidence intervals is available from RePEc: https://ideas.repec.org/s/wuu/hscode.html
- Implementation in Python: https://github.com/Mottl/hurst
- Matlab code for computing real Hurst and complex Hurst: https://www.mathworks.com/matlabcentral/fileexchange/49803-calculate-complex-hurst
- Hurst, H.E. (1951). "Long-term storage capacity of reservoirs". Transactions of American Society of Civil Engineers. 116: 770.
- Hurst, H.E.; Black, R.P.; Simaika, Y.M. (1965). Long-term storage: an experimental study. London: Constable.
- Mandelbrot, B.B.; Wallis, J.R. (1968). "Noah, Joseph, and operational hydrology". Water Resour. Res. 4 (5): 909–918. Bibcode:1968WRR.....4..909M. doi:10.1029/wr004i005p00909.
- Mandelbrot, Benoît B. "The (Mis)Behavior of Markets": 187. Cite journal requires
- Torsten Kleinow (2002)Testing Continuous Time Models in Financial Markets, Doctoral thesis, Berlin[page needed]
- Qian, Bo; Rasheed, Khaled (2004). HURST EXPONENT AND FINANCIAL MARKET PREDICTABILITY. IASTED conference on Financial Engineering and Applications (FEA 2004). pp. 203–209. CiteSeerX 10.1.1.137.207.
- Feder, Jens (1988). Fractals. New York: Plenum Press. ISBN 978-0-306-42851-7.
- Mandelbrot, Benoit B. (1985). "Self-affinity and fractal dimension" (PDF). Physica Scripta. 32 (4): 257–260. Bibcode:1985PhyS...32..257M. doi:10.1088/0031-8949/32/4/001.
- Gneiting, Tilmann; Schlather, Martin (2004). "Stochastic Models That Separate Fractal Dimension and the Hurst Effect". SIAM Review. 46 (2): 269–282. arXiv:physics/0109031. Bibcode:2004SIAMR..46..269G. doi:10.1137/s0036144501394387.
- Mandelbrot, Benoit B.; Wallis, James R. (1969-10-01). "Robustness of the rescaled range R/S in the measurement of noncyclic long run statistical dependence". Water Resources Research. 5 (5): 967–988. Bibcode:1969WRR.....5..967M. doi:10.1029/WR005i005p00967. ISSN 1944-7973.
- Geweke, J.; Porter-Hudak, S. (1983). "THE ESTIMATION AND APPLICATION OF LONG MEMORY TIME SERIES MODELS". J. Time Ser. Anal. 4 (4): 221–238. doi:10.1111/j.1467-9892.1983.tb00371.x.
- J. Beran. Statistics For Long-Memory Processes. Chapman and Hall, 1994.
- Robinson, P. M. (1995). "Gaussian semiparametric estimation of long-range dependence". The Annals of Statistics. 23 (5): 1630–1661. doi:10.1214/aos/1176324317.
- Simonsen, Ingve; Hansen, Alex; Nes, Olav Magnar (1998-09-01). "Determination of the Hurst exponent by use of wavelet transforms". Physical Review E. 58 (3): 2779–2787. arXiv:cond-mat/9707153. Bibcode:1998PhRvE..58.2779S. doi:10.1103/PhysRevE.58.2779.
- R. H. Riedi. Multifractal processes. In P. Doukhan, G. Oppenheim, and M. S. Taqqu, editors, The- ory And Applications Of Long-Range Dependence, pages 625–716. Birkh¨auser, 2003.
- Aaron Clauset; Cosma Rohilla Shalizi; M. E. J. Newman (2009). "Power-law distributions in empirical data". SIAM Review. 51 (4): 661–703. arXiv:0706.1062. doi:10.1137/070710111.
- Annis, A. A.; Lloyd, E. H. (1976-01-01). "The expected value of the adjusted rescaled Hurst range of independent normal summands". Biometrika. 63 (1): 111–116. doi:10.1093/biomet/63.1.111. ISSN 0006-3444.
- Weron, Rafał (2002-09-01). "Estimating long-range dependence: finite sample properties and confidence intervals". Physica A: Statistical Mechanics and its Applications. 312 (1–2): 285–299. arXiv:cond-mat/0103510. Bibcode:2002PhyA..312..285W. doi:10.1016/S0378-4371(02)00961-5.
- Preis, T.; et al. (2009). "Accelerated fluctuation analysis by graphic cards and complex pattern formation in financial markets". New J. Phys. 11 (9): 093024. Bibcode:2009NJPh...11i3024P. doi:10.1088/1367-2630/11/9/093024.
- Gorski, A.Z.; et al. (2002). "Financial multifractality and its subtleties: an example of DAX". Physica. 316 (1): 496–510. arXiv:cond-mat/0205482. Bibcode:2002PhyA..316..496G. doi:10.1016/s0378-4371(02)01021-x.
- Mandelbrot, Benoît B., The (Mis)Behavior of Markets, A Fractal View of Risk, Ruin and Reward (Basic Books, 2004), pp. 186-195
- Alex Hansen; Jean Schmittbuhl; G. George Batrouni (2001). "Distinguishing fractional and white noise in one and two dimensions". Phys. Rev. E. 63 (6): 062102. arXiv:cond-mat/0007011. Bibcode:2001PhRvE..63f2102H. doi:10.1103/PhysRevE.63.062102. PMID 11415147.
- J.W. Kantelhardt, E. Koscielny-Bunde, H.A. Rego, S. Havlin, A. Bunde (2001). "Detecting long-range correlations with detrended fluctuation analysis". Physica A: Statistical Mechanics and its Applications. 295 (3): 441–454. arXiv:cond-mat/0102214. Bibcode:2001PhyA..295..441K. doi:10.1016/S0378-4371(01)00144-3.
- J.W. Kantelhardt, S.A. Zschiegner, E. Koscielny-Bunde, S. Havlin, A. Bunde, H.E. Stanley (2002). "Multifractal detrended fluctuation analysis of nonstationary time series". Physica A: Statistical Mechanics and its Applications. 87 (1): 87–114. arXiv:physics/0202070. Bibcode:2002PhyA..316...87K. doi:10.1016/s0378-4371(02)01383-3.
- Joseph L McCauley, Kevin E Bassler, and Gemunu H. Gunaratne (2008) "Martingales, Detrending Data, and the Efficient Market Hypothesis", Physica, A37, 202, Open access preprint: arXiv:0710.2583
- Bariviera, A.F. (2011). "The influence of liquidity on informational efficiency: The case of the Thai Stock Market". Physica A: Statistical Mechanics and its Applications. 390 (23): 4426–4432. Bibcode:2011PhyA..390.4426B. doi:10.1016/j.physa.2011.07.032.
- Roche, Stephan; Bicout, Dominique; Maciá, Enrique; Kats, Efim (2003-11-26). "Long Range Correlations in DNA: Scaling Properties and Charge Transfer Efficiency". Physical Review Letters. 91 (22): 228101. arXiv:cond-mat/0309463. Bibcode:2003PhRvL..91v8101R. doi:10.1103/PhysRevLett.91.228101. PMID 14683275.
- Yu, Sunkyu; Piao, Xianji; Hong, Jiho; Park, Namkyoo (2015-09-16). "Bloch-like waves in random-walk potentials based on supersymmetry". Nature Communications. 6: 8269. arXiv:1501.02591. Bibcode:2015NatCo...6E8269Y. doi:10.1038/ncomms9269. PMC 4595658. PMID 26373616.