R/S Analysis and Long Term Dependence in Stock Market Indices

Abstract

Recent studies indicating long term dependence in stock market indices have found a mean reversion process. However, studies using rescaled range (R/S) analysis have not found evidence of a mean reversion or ergodic process. Instead, evidence from these studies indicate either long term persistence in a nonperiodic cycle or short run Markovian dependence with no long term persistence. The purpose of this paper is to study the issue of long term dependence using rescaled range analysis. The empirical results obtained in this study support the persistent dependence/nonperiodic cycle results and suggest that the dependence arises from the general economic cycle.