Application of Hurst Exponent (H) and the R/S Analysis in the Classification of FOREX Securities
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International Journal of Modeling and Optimization, Vol. 8, No. 2, April 2018 Application of Hurst Exponent (H) and the R/S Analysis in the Classification of FOREX Securities Milton S. Raimundo and Jun Okamoto Jr financial time series by the hypothesis of the existence of a Abstract—This paper presents the relationship between the Fractal Market in an alternative to the traditional theory of Hurst Exponent (H) and the Rescaled Range Analysis (R/S) in Capital Markets. The method used for the estimated the classification of Foreign Exchange Market (FOREX) time calculation of the Hurst Exponent (H), using the R/S Analysis, series by the supposition of the existence of a Fractal Market in an alternative to the traditional theory of Capital Markets. In follows the methodology developed by Mandelbrot and such a way, the Hurst Exponent is a metric capable of providing Wallis [4], based on the works of Hurst [5], discussed by information on correlation and persistence in a time series. Peters [6] and presented by Couillard [7]. Many systems can be described by self-similar fractals as Some academic research initiatives have been developed Fractional Brownian Motion, which are well characterized by and performed in the field of econophysics to examine the this statistic. properties and phenomena of random walk and presence of long memory in financial time series. Index Terms—Hurst exponent, R/S analysis, fractal analysis, financial time series, fractional. In his paper, Qian [8] analyzed the Hurst exponent for Dow-Jones index. He found that the periods with large Hurst exponents could be predicted more accurately than those with I. INTRODUCTION H values close to random series, which suggested that stock markets were not totally random in all periods. The necessity to anticipate and identify changes in events Corazza [9] studied the returns in some FX Markets and he points to a new direction in line with the analysis of the discovered that the values of Hurst Exponent were fluctuations of prices of financial assets. This new direction statistically different from 0.5 in most of the samples. He also leads us to argue about new alternatives in Finance Theory found that the Hurst exponent is not fixed but it changes and Capital Markets. In the spirit of this contention the theory dynamically over time, concluding that FX Markets follow a of fractals arises by innovating the argumentation [1]. fractional Brownian motion. Empirical studies, especially in Hydrology and Cajueiro [10] measured the long-term dependence and Climatology, decade of 1950, reveal the presence of Long efficiency in emergence markets of stock indexes. He Memory (LM) in temporal and spatial data. These series suggested that the long-range dependence measures are more present persistence in the sample autocorrelations, that is, significant with Asian countries than for Latin American significant dependence between observations separated by a countries. long interval of time [2]. Others, like Cornelis [11], Singh [12] and Kyaw [13], also Harold Edwin Hurst [3] has spent much of his academic life studied the degree of long-term dependence and the fractional studying water storage issues. He invented a new statistical Brownian motion in several return curves by the application method, Hurst Exponent (H) that is applied in several areas of the Hurst Exponent. including Fractals and Chaos Theory, Long Memory Hence, despite the good results found in several studies, the Processes and Spectral Analysis. It provides concrete challenge in the prediction of financial time series by the information on correlation and persistence, which makes H an hypothesis of the existence of the Fractal Market is still open, excellent index for studying complex processes such as the either for forecasting financial time series or for forecasting financial time series. The values of the Hurst Exponent of trends for financial indicators. time series are estimated using the Rescaled Range Analysis This paper is organized as following: Section 2, Fractal (R/S) method. Time Series, presents a review of fractal theory relating it to The value of this exponent varies from 0 to 1. The more time series. Section 3, Hypothesis of the existence of a Fractal distinct from 0.5, the longer the long-term memory. Therefore, Market, compares the Fractal Market and the traditional processes with long memory are processes that have H > 0.5, Theory of Capital Markets. The Section 4, Hurst Exponent persistent processes, or H < 0.5, anti-persistent processes. For and the R/S Analysis, exposes the theoretical bases of the H = 0.5 the signal or process is random or Brownian Motion Hurst processes and the development of the R/S Analysis. [4]. Section 5, Methodology, exposes the method used for the This paper aims to present the relationship between the estimated calculation of the Hurst Exponent (H), using the Hurst Exponent and the R/S Analysis in the prediction of R/S Analysis. Section 6, Experimental Results, presents the R/S Analysis evaluation in a use case. Finally, Section 7, Manuscript received March 1, 2018; revised April 28, 2018. Milton S. Raimundo,and Jun Okamoto Jr., are with Escola Politécnica of Conclusion, presents the general analysis and the the University of São Paulo - Department of Mechatronics Engineering and contributions of this paper, as well as suggestions for future Mechanical Systems, Brazil (e-mail: [email protected], email: papers. [email protected]). DOI: 10.7763/IJMO.2018.V8.635 116 International Journal of Modeling and Optimization, Vol. 8, No. 2, April 2018 II. FRACTAL SERIES triangular structure to consist of gradually smaller triangles It can be seen that many of the spatial structures in nature that are perfect copies of the initial shape of the figure. Hence, are the result of the combination of a considerable number of by applying a zoom to any part has something similar to the identical components, implying the existence of the principle figure as a whole as exposed in Fig. 1(a). In the extreme of the of having similar self-structures called fractal [14]. infinite applications of this process is obtained an exact The concept of fractals relates to attempts to measure the similar auto-fractal figure [17]. size of the targets for which traditional definitions based on C. Fractal Dimension Euclidean geometry do not work well. A fractal, usually of Assis [17] also emphasizes that by the classical Euclidean fractional size, is a mathematical entity that can present itself concept a coordinate, length, describes a line, two coordinates, as a spatial pattern or even a time series, and can be divided length and width, describe a plane and three coordinates, into parts, where each of these parts is similar to the original length, height and width, and describe a volume. By this prism, object [15]. a point has dimension zero. A. Fractal Geometry Associated with the perpendicular axes, the Euclidean Fractal is defined by a geometric figure, of fragmented dimension specifies in one, two or three dimensions some appearance, which can be subdivided indefinitely into parts, point respectively belonging to a line, area or volume. It may where the parts are, in some way, reduced copies of the whole. be noted that Euclidean dimensions are always integers. There is a geometric fractal when the whole is a perfect Considering the Koch curve, exhibited in Fig. 2, which magnification of a part. The concept of geometric fractal was construction is done by using a line segment, which is divided created in the early twentieth century to show that there were into three equal segments. From there, it replaces the third mathematical elements different from what the classical median part with an equilateral triangle removing the base. geometry of Euclid (300 BC) said [16]. The iterative procedure is the application of the rule to each of the line segments that resulted from the previous iteration B. Deterministic Fractals [17]. Exact self-similarity is understood to be the invariance of Observing each step of the iterative process, it is noted that, the structure after an isotropic transformation, that is, that from one level to the next, three segments are replaced by four which occurs with the same intensity in all directions. In this of equal length, so the total length is multiplied by ¾ in the matter, by taking an object S, as a set of points correlation of successive levels. It also be seen that the limit of R{ x1 , x 2 , x 3 ...} and applying a factor of scale b in a similar a geometric succession of ratio ¾ is infinite, determining that auto transformation, it changes the coordinates of the points the final figure will have an infinite length. Mandelbrot also had observed that and denominated this limit. for bR{ bx1 , bx 2 , bx 3 ,...}. Then the set S composed by the Thus, in the nth level, the length of the Kock curve will be points of coordinates R, is self-similar if it is invariant after given by: performing the transformation [17]. As an example, a fractal called the Sierpinski Triangle LLL 3 4 3 n (1) shown in Fig. 1(a). Its basic construction begins with an nn1 equilateral triangle, fully filled. Considering initially the midpoints of the three sides that, together with the vertices of Fig. 2 represents the first four levels for the construction of the original triangle, form four new congruent triangles. the Kock curve and their respective lengths. Subsequently, the central triangle is subtracted, thereby Comparing this type of curve, which has infinite detailing, removing the first stage of the basic building process. This with a conventional line, this curve occupies more space, and subtraction results in three congruent triangles whose sides hence has a fractal dimension greater than 1 : 0, even so it measure half the side of the original triangle.