Modeling long‐term memory effect in stock prices: A comparative analysis with GPH test and Daubechies wavelets

Abstract

Purpose

This paper, using Turkish stock index data, set outs to present long‐term memory effect using chaotic and conventional unit root tests and investigate if chaotic technique as wavelets captures long‐memory better than conventional techniques.

Design/methodology/approach

Haar and Daubechies as wavelet‐based OLS estimator and GPH and other classical models are applied in order to investigate the performance of long memory in the time series.

Findings

The results indicate that Daubechies wavelet analysis provide the accurate determination for long memory where conventional techniques does not.

Originality/value

The research results have both methodological and practical originality. On the theoretical side, the wavelet‐based OLS estimator is superior in modeling the behaviours of the stock returns in emerging markets where non‐linearities and high volatility exist due to their chaotic natures. For practical aims, on the other hand, the results show that the Istanbul Stock Exchange is not in the weak‐form efficient because the prices have memories that are not reflected in the prices, yet.

Citation

Ozun, A. and Cifter, A. (2008), "Modeling long‐term memory effect in stock prices: A comparative analysis with GPH test and Daubechies wavelets", Studies in Economics and Finance, Vol. 25 No. 1, pp. 38-48. https://doi.org/10.1108/10867370810857559