The consentaneous model of the financial markets exhibiting spurious nature of long-range memory

Authored by Aleksejus Kononovicius, V Gontis

Date Published: 2018

DOI: 10.1016/j.physa.2018.04.053

Sponsors: No sponsors listed

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

It is widely accepted that there is strong persistence in the volatility of financial time series. The origin of the observed persistence, or long-range memory, is still an open problem as the observed phenomenon could be a spurious effect. Earlier we have proposed the consentaneous model of the financial markets based on the non-linear stochastic differential equations. The consentaneous model successfully reproduces empirical probability and power spectral densities of volatility. This approach is qualitatively different from models built using fractional Brownian motion. In this contribution we investigate burst and inter-burst duration statistics of volatility in the financial markets employing the consentaneous model. Our analysis provides an evidence that empirical statistical properties of burst and inter-burst duration can be explained by non-linear stochastic differential equations driving the volatility in the financial markets. This serves as an strong argument that long-range memory in finance can have spurious nature. (C) 2018 Elsevier B.V. All rights reserved.

Tags

financial markets Fluctuations Complex-systems Agent-based modeling Spurious memory Stochastic calculus Bursting behavior Volatility return intervals