Scaling laws in variance as a measure of long-term dependence

Jonathan Batten*, Craig Ellis, Robert Mellor

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

9 Citations (Scopus)

Abstract

Many asset-pricing models require an annualized risk coefficient that is determined by the linear rescaling of the variance from other time intervals. However, this approach may not be appropriate for distributions that display linear dependence or leptokurtosis. Research in this paper investigated scaling relationships for spot month daily closing prices for four currency futures contracts (British pound [GBP]/United States dollar [USD], German mark [DMK]/USD, Japanese yen [JPY]/USD, and Swiss franc [CHF]/USD) traded on the Chicago International Money Market (IMM). Our results suggested that although all four series were non-Gaussian, they displayed similar scaling properties that were not consistent with their underlying level of long-term dependence. These results demonstrate that models of long-term dependence may be biased and that scaling laws can be used as an alternative and accurate proxy of dependence.

Original languageEnglish
Pages (from-to)123-138
Number of pages16
JournalInternational Review of Financial Analysis
Volume8
Issue number2
Publication statusPublished - Jun 1999

Keywords

  • C49, F31, G15
  • Currency futures
  • Long-term dependence
  • Scaling
  • Volatility

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