CH APTER-I I

Review of Literature and

Research D esign
The Second Chapter is divided in to two sections as follows:

Section -A : Review of Literature

Section -B : Design of the Study

SECTION – A

2.1. REVIEW OF LITERATURE

Several studies have been carried out to analyze the fractal dimension in India
as well as abroad. The reviews of previous studies, made in the area of research, are
reviewed below.

A paper entitled, Fractal Structure in the Capital Markets, by Edgar E.Peters

(1989), tested the behaviour of stock and bond returns of Standard & Poor 500, using
Rescaled Range Analysis by computing the Hurst Exponent. The higher persistence in
relative stock and bond returns indicated that investors’ interpretation of events was not
reflected immediately in price, as the Efficient Market suggests. The level of
persistence in the stock and bond markets indicates the presence of considerable ‘white
noise’, which attempted to forecast these markets over the long term and found that the
returns showed stronger influence of investors’ sentiment31.

Andrew W.Lo. (1991), in his paper entitled, Long-Term Memory in Stock

Market Prices, studied the long-run memory in daily and monthly stock returns
indexes over several time periods. The study used Monte Carlo simulations and
modified R/S test for finding out the long-run memory. The study found that there were
little evidences for long-term memory in historical U.S. stock market returns. It is
pointed out that the security prices must be immune to persistent in response to
informational asymmetries, especially over longer time spans32.

A study entitled, Fractal Structure in Currency Futures Price Dynamics:

Introduction, by Hsing Fang, et al. (1994), estimated the fractal structure in prices of
Currency Futures of British Pound, German Mark, Japanese Yen and Swiss Franc. The
results of skewness and kurtosis and the p-values suggested the presence of significant
departures from normality in all the currency futures series. Besides, there was presence

31
Edgar E.Pet ers (1989). Fract al St ruct ure in t he Capit al M arket s. Financial Analyst s Journal, 45(4),
32-37.
32
Andr ew W.Lo (1991). Long-Term M emor y in St ock M arket Prices. Economet rica, 59 (5),1279-1313.
19
of heteroskedasticity in the currency futures return data. Finally, the study found that
the time series having fractal structure, was characterized by long-term dependence and
non-periodic cycles33.

Corning Michael P. (1995), in his paper entitled, Fractal Market Analysis -

Applying Chaos Theory to Investment and Economics, discussed Fractal Time
Series, Fractal (R/S) analysis, fractal noise and noisy chaos. The fractal analysis was
used for Dow Jones Industrials Data (1888-1990), S&P Tick Data (1989-1992), Gold
prices (1968-1992), U.K inflation data (1662-1973) and for the exchanges rates
Mark/Dollar, Pound/Dollar and Yen/Dollar (1972-1990). According to this study, there
were trends and cycles at all investment horizons since the information was processed
differently at the various frequencies. Even though the exact structure of trend was
predictable, it was never perfectly predictable and this keeps the market stable34.

A study entitled, R/S Analysis and Long Term Dependence in Stock Market
Indices, by David Nawrocki (1995), analyzed the long range dependence using
rescaled range analysis in CRSP (Center for Research in Security Prices) monthly value
weighted index and the S&P 500 daily index. The study found the maximum value of
Hurst exponent at around 50 months. A Durbin Watson statistic found no
autocorrelation during the study period. Finally, it was found that the persistent
dependence existed in the CRSP index, suggesting that the dependence emereged from
the general economic cycle35.

Muller U.A., et al. (1995), in their article entitled, Fractals and Intrinsic Time
- A Challenge to Econometricians, demonstrated the Intra-Day Foreign Exchange
Prices of USD-DEM of monthly and weekly seasonal aspect. The results found that
fractal structure existed in the sample data. The majority of results value was
statistically significant and thus the parameters were identical for all Foreign Exchange
rates. The study found that time value and fractal properties supported the hypothesis of

33
Hsing Fang, Kon S.Lai & M ichael Lai, (1994). Fract al St ruct ure in Currency Fut ures Price Dynamics:
Int roduct ion. The Journal of Fut ur es M arket , 14 (2), 169-181.
34
Corning, M ichael P. (1995). Fr act al M arket Analysis - Applying Chaos Theory t o Invest ment &
Economics. Journal of Financial Planni ng, 8 (4), 156.
35
David Naw rocki (1995). R/ S Analysis and Long Term Dependence in St ock M arket Indices. M anager ial
Finance, 21(7), 78-91.
20
a heterogeneous market where different market participants analyzed past events and
news with different time horizons36.

A study entitled, Another Look at Long Memory in Common Stock

Returns, by Craig Hiemstra and Jonathan D.Jones (1997), scrutinized the return series
of large number of common stocks by applying the Modified Rescaled Range (MRS)
test. The results indicated that long memory was not a widespread characteristic of
these sample stocks. The results from logic study indicated that the returns of sample
firms with heavy-tailed distributions and those with large risk-adjusted average returns
were more likely to generate right tailed MRS test rejections. It is concluded that the
relatively few returns series which are rejected by the right tailed test, appear to be tied
to persistent long memory. Therefore, there was some evidence consistent with
persistent long memory in the returns of a small proportion of stocks37.

Madhusoodanan T.P. (1998), in his article entitled, Persistence in the Indian

Stock Market Returns: An Application of Variance Ratio Test, analyzed the mean
return reverting tendencies of the Bombay Stock Exchange stock prices, with the help
of variance ratio test and the autocorrelation test, to find out the short term memory in
the stock market. The study was based on aggregate level of market indices and
disaggregated level of individual companies. The variance ratio test suggested that at
the aggregate level of BSE sensitive and national indices, the random walk hypothesis
could not be accepted and the movements appear to be persistent. Thus the study found
that there was long-term mean reversion in the Indian stock market38.

John S.Howe, et al. (1999), in their study, Much Ado About Nothing Long-
Term Memory in Pacific Rim Equity Markets, examined the daily returns of
developed and emerging markets like Nikkei Stock Average (Japan), the All Ordinaries
Index (Australia), the Hang Seng Index (Hong Kong), the Strait Times Index
(Singapore) the Korea Composite Stock Price Index (Korea) and the Weighted Stock
Index (Taiwan) for a period of thirteen and half years. It was found that long term

36
M uller U.A, Dacorogna M .M , Dav’e R.D, Pict et O.V, Olsen R.B & Ward J.R (1995). Fract als and Int rinsic
Time-A Challenge t o Econom et r icians, Int ernat ional Confer ence of t he Applied Econom et rics
Associat ion, Luxem bourg.
37
Craig Hiemst ra & Jonat han D.Jones (1997). Anot her Look at Long M emory in Com mon St ock Ret urns,
Jour nal of Empir ical Finance, 4, 373-401.
38
M adhusoodanan T.P. (1998). Per sist ence in t he Indian St ock M arket Ret urns: An Applicat ion of
Variance Rat io Test . Vikalpa, 23(4), 61-73.
21
dependence existed in the Japanese, Singaporean, Korean and Taiwanese indices.
Besides, the absence of long term dependence in equity markets was consistent with
informational efficiency and the inability to capture abnormal returns from long cycle
patterns39.

The study entitled, Long Memory in Futures Prices, by John T Barkoulas,

et al. (1999), investigated the fractional roots in the futures prices for selected
commodities, foreign currencies and stock indexes. The return series for commodities
and currencies exhibited long range positive dependence with the use of Fractional
Integration Test, ARFIMA. The study found Fractional Dynamics, characterized by
irregular cyclical fluctuations, with long-term dependence and the fractal structure with
long memory in several series, highlighting the similarities and differences in dynamic
behaviour among futures return series40.

Kwaku K.Opong, et al. (1999), in their study entitled, The Behaviour of Some
UK Equity Indices: An application of Hurst and BDS Tests, examined the
behaviour of the London Financial Times Stock Exchange (FTSE). The study used
statistical tools like OLS Regression, R/S analysis, BDS Test and GARCH (1,1) model.
The results of the BDS test indicated that the FTSE Index series were not Independent
and Identically Distributed (IID) and FTSE stock index returns series was not truly
random, since some cycle length showed up more frequently than would be expected in
a true random series. The study found R/S analysis to have low power compared to the
BDS test41.

A study by Walter Willinger et al. (1999), on Stock Market Prices and Long
Range Dependence, tested the time series daily stock returns of CRSP (Center for
Research in Security Prices) during a period of 25 years from 1962 to 1987 using R/S
statistic and ARIMA, to test the long range dependence. The study using daily CRSP
data for the Equal-Weighted (EW) return indices and the daily data for the Value-
Weighted (VW) return indices, found that there was no evidence of long-run memory

39
John S.Howe, Der yl W.M art in & Bob G.Wood, Jr. (1999). M uch Ado About Not hing Long-Term
M emor y in Pacif ic Rim Equit y M arket s, Int ernat ional Review of Financial Analysis, 8(2), 139-151.
40
John T Barkoulas, Walt er C.Labys & Joseph I. Onochie, (1999). Long M emory In Fut ures Prices. The
Financial Review, 34 (4), 91-100.
41
Kw aku K.Opong, Gwynet h M ul holland, Alan F. Fox & Kambiz Farahmand, (1999). The behaviour of
some UK equit y indices: An applicat ion of Hurst and BDS Test s. Journal of Empirical Finance, 6, 267-
282.
22
in both EW and VW returns. The study suggested that statistical analysis could not be
expected to provide a definitive answer concerning the presence or absence of long
range dependence in asset price returns42.

The working paper namely, Long memory in the Greek Stock Market, by
John T. Barkoulas, et al. (2000), studied the monthly stock returns series of thirty most
heavily traded stocks on the Athens Stock Exchange (ASE30) over longer forecasting
horizons. The study applied AFRIMA Model to find the long range dependence and the
results exhibited fractional dynamics with long memory. Using the spectral regression
method, the fractional dynamics, with long-memory features in the stock returns series
of an emerging capital market (Athens Stock Exchange in Greece), was found. The
price movements in the Greek stock market appeared to be influenced by realization
from both the recent past and the remote past. It was found that the fractional model
was a more flexible and parsimonious way of modelling both short term and long term
properties of the ASE30 stock returns series43.

Golaka C Nath (2001), in his study entitled, Long Memory and Indian Stock
Market - An Empirical Evidence, tested the long memory in Indian stock market
using daily closing values of the NSE Nifty index returns. The variance ratio test and
Rescaled Range (R/S) analysis were used to test the long memory in the CNX Nifty
daily returns. The result of variance ratio showed that in the short as well as long term,
the ratio was less than one and it indicated that there was a definite mean reversion
tendency for the Indian stock market. None of the values of Hurst Exponent was equal
to 0.5 and thus the analysis clearly implied that there was no short term memory. In
other words, long term memory existed in the market returns44.

Jorge Cavalcanate and Ata Assaf (2002), in their article entitled, Long-range
Dependence in the Returns and Volatility of the Brazilian Stock Market, tested the
long memory in the daily returns and volatility series. The study found that significant
long memory was demonstrated in the volatility measures while there was a little

42
Walt er Willinger, M urad S. Taqqu & Vadim Teverovsky (1999) St ock M arket Prices and Long-range
Dependence. Finance St ochast , 3,1-13
43
John T. Barkoulas, Christ opher F. Baum & Nickolaos Travlos, (2000). Long memory in t he Greek st ock
market . Applied Financial Economics, 10(2), 177-184.
44
Golaka C Nat h (2001). Long M emory and Indian St ock M arket - An Empirical Evidence. Elect ronic copy
available at ht t p:/ / www.ut iicm.com/ cmc/ pdfs/ 2001/ golakanat h_longmemor y_indian_ st ock _market
.pdf.
23
evidence of short memory in the returns themselves. The study evidenced that the
fractal structure existed in the emerging stock market of Brazil. The study concluded
that stock market dynamics in the emerging market, even with its different institutions
and information flows than the developed market, presented similar return-generating
process to the preponderance of studies employing other data45.

A paper entitled, Long Memory in Stock Returns: Some International

Evidence, by Olan T. Henry (2002), tested the long memory in the monthly stock index
returns of German, Japanese, South Korean and Taiwanese markets, using parametric
and semiparametric estimators. The study found that the semi parametric approaches
provided strong evidence of long memory in the South Korean returns and some
evidences for long memory in German, Japanese and Taiwanese returns. The remaining
sample returns series were broadly consistent with short memory processes. It was
found that relative transaction costs were greater for trading strategies based on short
horizon predictability than for those strategies based on long horizon predictability.
Thus the long horizon strategy represented an unexploited profit opportunity46.

A joint study by Singh J.P. and Parikshit Dey (2002), entitled, Risk
Measurement, Nonlinearities, and Chaos, examined the efficacy of the statistical
measures of risk of stock market returns of two variables i.e., A&B using the Rescaled
Range Analysis and Hurst’s Exponent, Fractal Dimensions and the Lyapunov
Exponents. The results found that the stock market recorded nonlinearities. Theoretical
perspective of chaos and the capital markets, Risk measurement, Temporal
Nonlinearity and Risk are also discussed in this article 47.

Erhan Bayraktar et al. (2003), in their paper entitled, Estimating the Fractal
Dimension of the S&P 500 Index using Wavelet Analysis, studied the S&P 500
Index data sampled at one-minute intervals, over a period of 11.5 years, from 1989 to
2000 using the Hurst parameter. The method exhibited robustness to the non-
stationarities in seasonal volatility, fat tailed distributions of increments and possible

45
Jorge Cavalcanat e & At a Assaf, (2002). Long-range Dependence in t he Ret urns and Volat ility of t he
Brazilian St ock M ar ket . Elect ronic copy available at ht t p:/ / w ww.long-m emory.com/ ret ur ns/
Cavalcant eAssaf 2002.pdf
46
Olan T. Henry (2002). Long M emory in St ock Ret urns: Some Int ernat ional Evidence. Applied Financial
Economics, 12(10), 725-729.
47
Singh J.P. & Parikshit Dey, (2002). Risk M easurement , Nonlinearit ies and Chaos. Singapor e
M anagem ent Review , 24 (2), 47-55.
24
variations in the Hurst parameter. The analysis of the Hurst parameter was around the
0.6 level during 1990s but dropped closer to the efficient markets level of 0.5 during the
period 1997 to 2000. It was found that the stock market was coinciding with the growth
in Internet trading among small investors48.

A research study entitled, Evidence of Long Range Dependence in Asian

Equity Markets: The Role of Liquidity and Market Restrictions, by Daniel
O.Cajueiro and Benjamin M.Tabak (2004), investigated the stock market efficient in
China, Hong Kong and Singapore. The study used the long memory dependence
approach in ‘A’ type of shares, Singapore and Chinese ‘B’ type of shares. The study
found that there was long range dependence in the stock market and suggested that
liquidity and capital restrictions may play a role in explaining results of market
efficiency tests. The study also suggested that more research was needed on testing for
long range dependence for different markets, to understand the market trends49.

Bio Qian and Khaled Rasheed (2004), in their paper on, Hurst Exponent and
Financial Market Predictability, analyzed the Hurst Exponent for trading-day periods
of the Dow-Jones index. This study used Hurst Exponent, Monte Carlo Simulation,
Scramble test and neural networks to measure the long term memory and fractality of a
time series for predicting the financial market. Hurst Exponent ranged from 0.4200 to
0.6804 during the study period. Monte Carlo simulation test was used to know whether
the series were random. It was found that periods, with large Hurst Exponents, could be
predicted more accurately than those with H values close to random series. It is
suggested that stock markets were not totally random during the period under the study.
Some periods recoreded strong trend structure and this structure could be learnt by
neural networks to benefit forecasting50.

Gordon R.Richards (2004), in the paper entitled, A Fractal Forecasting Model

for Financial Time Series, evaluated the Canadian dollar, German mark, Japanese yen,

48
Er han Bayrakt ar, H.Vincent Poor & K.Ronnie Sircar (2003). Est imat ing t he Fract al Dimension of t he
S& P 500 Index usi ng Wavelet Analysis. Elect ronic copy available at ht t p:/ / w ww.princet on.edu/ ~sircar
/ Public/ ARTICLES/ bps.pdf .
49
Daniel O.Cajueiro & Benjamin M .Tabak. (2004). Evidence of Long Range Dependence in Asian Equit y
M arket s: t he role of liquidit y and market rest rict ions. Physica A: St at ist ical M echanics and it s
Applicat ions, 342 (3-4), 656–664.
50
Bio Qian & Khaled Rashed, (2004). Hurst Exponent and Financial M arket Predict abilit y. Proceedings of
t he 2nd IASTED Int ernat ional Conference on Financial Engineering and Applicat ions, 203-209.
25
Swiss franc, UK pound, Federal funds rate and 90-day Treasury bill rate for the period
1971 to 2001 with expirations at the end of each quarter using Levy motion. The series
tested were the September contracts for the Canadian Dollar and German Mark, the
June contracts for the Swiss Franc and the Japanese Yen and the December contract for
the British Pound. Daily actual exchange rate series for the same countries were also
analyzed. The results of the series exhibited fractal structure during the study period. It
was found that volatility diffusion models, with multiple stochastic factors, could
generate fractal structures51.

Possible Causes of Long-Range Dependence in the Brazilian Stock Market,

an article by Daniel O. Cajueiro and Benjamin M. Tabak (2005a), investigated the long
range dependence in the stocks of BOVESPA Index in Brazilian Stock Market for a
period of six years. The Hurst Exponent measured the long range dependence. The
study found that the long range dependence might be generated by trading mechanisms
and not by fundamentals. It was found that the prices were not solely driven by
fundamentals but also by other market characteristics and the speculative behaviour and
the speculative bubbles in the stock markets have important roles in the determination
of prices52.

Daniel O. Cajuerio and Benjamin M.Tabak (2005b), in their study entitled,

Testing for Long Range Dependence in Banking Equity Indices, analyzed the long
range dependence for mean returns and volatility for banking sector indices for forty
one different countries, including developed and emerging economies for the study
period. To test the long range dependence, the study employed the R/S analysis. It was
found that there was strong long term dependence for banking sector indices around the
world for volatility. The study also suggested that the emerging markets possessed a
stronger degree of predictability than developed markets53.

A joint study on, The Rescaled Variance Statistic and the Determination of
the Hurst Exponent, by Daniel O. Cajueiro and Benjamin M. Tabak (2005c),

51
Gordon R. Richards, (2004). A Fract al Forecast ing M odel for Financial Time Series. Journal of
Forecast ing, 23, 587-602.
52
Daniel O. Cajueiro & Benjamin M . Tabak (2005a). Possible Causes of Long-Range Dependence in t he
Brazilian St ock M ar ket . Physica A: St at ist ical M echanics and it s Applicat ions, Science Dir ect , 345 (3-4),
635-645.
53
Daniel O. Cajuerio & Benjamin M .Tabak (2005b). Test ing for Long Range Dependence in Banki ng
Equit y Indices. M at hemat ics and Com put ers in Simulat ion, Science Direct , 70, 172-179.
26
estimated the Hurst Exponent using both Rescaled Range and Variance Statistic
methodologies. The study tested the long range dependence in equity returns for
Australia, Hong Kong, Singapore and Taiwan. From the analysis of V/S, the study
suggested that there was some evidence of long range dependence for Australia, Hong
Kong, Singapore and Japan, in both equity returns and volatility54.

Enrico Onali and John Goddard (2005), in their study entitled, Are European
Equity Markets Efficient? New Evidence from Fractal Analysis, studied the stock
market indices of Mitbel, CDAX, FTSE 350, Amsterdam S.E. All-share, Madrid S.E.
All-Share, Swiss Market Index, PX-Glob of western and eastern European country and
also an index from the U.S. stock market, the Dow Jones Industrial Average. The study
used the Rescaled Range Analysis and Monte Carlo Simulation of ARFIMA to estimate
the Hurst exponent and to assess the degree of long range dependence for the above
eight sample stock market indices. It was found that there was evidence of long range
dependence in the log return series of the Mitbel and the PX-Globas. The values of
Hurst Exponent were significantly greater than 0.5 in log returns. It was observed that
long range dependence implied the predictable patterns in the log returns55.

The paper entitled, The Fractal Market Analysis and its Application on
Czech Conditions, by Tran Van Quang (2005), analysed the Czech equity price index
using the Fractal Market Hypothesis. The daily PX50 data set was subjected to R/S
analysis over a period of more than 11 years from 1993 to 2004. It was found that the
Hurst Exponent for stock returns of Czech Republic was 0.662. The fractal dimension
of time series of stock returns for PX50 index was 1.338. The result revealed the fact
that the price changes on Czech equity market did not follow a random walk and the
market was far behind efficient. The study found that the behaviour of short-term trader
was quite different from that of long-term investors56.

Assaf A. (2006), in his article entitled, Persistence and Long-range

Dependence in the Emerging Stock Market of Kuwait, tested the stock market of

54
Daniel O. Cajueiro & Benjamin M . Tabak. (2005c). The Rescaled Var iance St at ist ic and t he
Det erminat ion of t he Hurst Exponent . M at hemat ics and Comput ers in Simulat ion, Elsevier, 70, 172-
179.
55
Enrico Onali & John Goddard (2005). Are Eur opean Equit y M ar ket s Eff icient ? New evidence from
fract al analysis. Elect ronic copy available at ht t p:/ / ssr n.com/ abst ract =1805044.
56
Tr an Van Quang (2005), The Fract al M arket Analysis and it s Applicat ion on Czech Condit ions. Act a
Oeconomica Pragensi, 13 (1), 101-111.
27
Kuwait having long memory in the monthly returns, absolute returns, squared returns
and modified long squared returns, using the analysis of rescaled range statistic and
rescale variance statistic. The results showed that the Kuwait Stock Market had an
underlying fractal structure and disputed the hypothesis of market efficiency. It was
inferred that the stock market returns and volatility in Kuwait, presented similar return-
generating process and randomly coincided with those patterns observed in the more
mature stock markets of developed countries57.

Gil-Alana L.A. (2006), in his article entitled, Fractional Integration in Daily

Stock Market Indexes, analyzed the long range dependence in the sample indices like
EOE, DAX, Hang Seng, FTSE 100, S&P 500, CAC 40, Singapore all Shares and the
Japanese Nikkei. To examine the stochastic behaviour of stock market indices, the
study used fractionally integrated techniques. It was found that the Hang Seng and the
Singapore All Shares, with orders of integration higher than one, seemed to be most
nonstationary and the S&P 500 was in the least nonstationarity series, with values
smaller than one and showed mean reversion. The study pointed out that long range
dependence was a source of long term predictability and therefore, the long-horizon
strategy might represent an unexploited profit opportunity58.

Prasad V.Bidarkota and Huston.J MC Culloch (2006), in their study entitled,

Testing for Persistence in Stock Returns with GARCH – Stable Shocks,
investigated the persistence of CRSP monthly stock returns for characterizing normal
behaviour. The stock returns exhibited significant persistence in volatility analyzed by
GARCH process. The study found the predictability of monthly stock returns to be
negative. At the same time, the state space model failed to reveal a statistically
significant persistent signal in stock returns, after taking into account of non-normality
and volatility persistence in the series. The study also found that real stock prices did
not take an IID (independent and identically distributed) random walk and they did
appear to follow a Heteroskedastic martingale59.

57
Assaf A (2006). Persist ence and Long-range Dependence in t he Emerging St ock M arket of Kuwait . The
M iddle East Business and Economic Review, 18(1), 1-17.
58
Gil-Alana L.A. (2006). Fract ional Int egrat ion in Daily St ock M arket Indexes, Review of Financial
Economics, 15, 28-48.
59
Prasad V.Bidarkot a & Hust on.J M C Culloch. (2006). Test ing for Persist ence in St ock Ret ur ns wit h
GARCH – St able Shocks, Quant it at ive Finance, 4:3, 256-265, DOI: 10.1088/ 1469-7688/ 4/ 3/ 002.
28
 A study by Assaf A. (2007), entitled Fractional Integration in the Equity
Markets of MENA region, investigated the long-range dependence in the emerging
stock market returns of Egypt, Jordan, Morocco and Turkey, using the modified
rescaled range statistic (R/S) and the rescaled variance statistic (V/S). The long memory
was demonstrated in the series and implied a fractal market structure in the Middle East
and North African (MENA) equity markets. The findings of the study indicated that the
presence of long memory in volatility due to shifts in variance could not be confirmed
for the MENA equity markets60.

Adnan Kasman and Erdost Torun (2007), in their study entitled, Long Memory
in the Turkish Stock Market Return and Volatility, investigated the long memory
properties of the returns and the volatility of the Turkish stock market. The return series
was modelled by using an ARFIMA model. The GARCH, IGARCH and FIGARCH
models were used to model volatility. The study results indicated that the returns series
showed evidences of long memory in Turkish stock market. The study also presented
evidence of long memory in volatility in the return series. It was implied that The
Turkish stock index (ISE-100) recorded the impact of news and shocks from the recent
past61.

An article entitled, A Simple Generalized Long Persistence Realized

Volatility Model, by Wen Cheong Chin et al (2007), investigated the volatility
measurement of Kuala Lumpur Stock Exchange (KLSE) index prices. Autoregressive
Fractionally Integrated Moving Average Model and Heterogeneous Autoregressive
were used to find out the long memory and volatility in the market and to study the
statistical behaviour of the emerging market. The results clearly showed that the long
memory in the stock market was due to significant relation between news and volatility.
It is found that the results which implied that good and bad news have significant
impact for upcoming volatility62.

60
Assaf A (2007). Fract ional Int egrat ion in t he Equit y M arket s t o M ENA Region. Applied Financial
Economic, 17 (9), 709.
61
Adnan Kasman & Er dost Tor un (2007). Long M emory in t he Turkish St ock M arket Ret ur n and
Volat ilit y. Cent ral Bank Review, 2, 13-27.
62
Wen-Cheong Chin, Zaidi Isa & Abu Hassan Shaari M ohd Nor, (2007). A Simple Generalized Long
Persist ence Realized Volat ilit y M odel. Int ernat ional Journal of Business and Societ y, 8 (1), 1-14.
29
 A study entitled, Testing for Long-Range Dependence in World Stock
Markets by Daniel O.Cajueiro and Benjamin M. Tabak (2008), examined the long
range dependence in equity returns and volatility, using R/S and V/S methodologies for
forty one equity indices from different countries. To rank and compare different
degrees of long-range dependence among stock indices, the study used the Wald
statistic. The study found that the world equity indices possessed long range
dependence in volatility and there was less evidence of long range dependence in equity
returns. The study suggested that emerging markets possessed stronger long range
dependence in equity returns than developed economies63.

Another study entitled, Unifractality and Multifractality in the Italian Stock

Market, by Enrico Onali and John Goddard (2008), found evidence of the non random
walk hypothesis in the daily log returns series of Mitbel, FTSE 100 and Dow Jones
Industrial Average (DJIA). The study used various measures like Rescaled Range
Analysis (RRA), Multifractal Detrended Fluctuation Analysis to find out the fractal.
The random walk hypothesis was evaluated against alternatives, both unifractality and
multifractality. The study provided evidence of departure from the weak-form Efficient
Market Hypothesis in the Italian stock market, by examining the unifractal and
multifractal properties of the return series for the Mitbel index64.

A research study namely, Application of the Fractal Market Hypothesis for

Macroeconomic Time Series Analysis, by Jonathan M Blackledge (2008), explored
the conceptual background to financial time series analysis and financial signal
processing in terms of the Efficient Market Hypothesis. Theoretical explanation of
random walk processes, Hurst processes, levy processes and fractional processes are
discussed in this study65.

According to the study entitled, Non-periodic Cycles and Long Memory

Property in the Korean Stock Market, by Seong-Min Yoon and Sang Hoon Kang
(2008), there was presence of long memory property and non-periodic cycles in the

63
Daniel O. Cajueiro & Benjami n M . Tabak (2008). Test ing for Long-Range Dependence in World St ock
M arket s. Chaos, Solut ions and Fract als, Science Direct , 37, 918-927.
64
Enrico Onali & John Goddar d, (2008). Unifract alit y and M ult ifr act alit y in t he It alian St ock M arket .
Elect ronic copy available at : ht t p:/ / ssr n.com/ abst ract =1281472.
65
Jonat han M Blackledge, (2008). Applicat ion of t he Fract al M arket Hypot hesis for M acroeconomic
Time Series Analysis. ISAST Transact ions on Elect ronics and Signal Processing, 1 (2), 1-22.
30
KOSPI returns of Korean stock market and the study was based on 7,062 observations.
It was found that the Korean stock market exhibited a high degree of persistence, once
the short-term dependence effects were removed by using autoregressive residuals. In
addition to this, the study found non-periodic cycles in the Korean stock market during
two and four years in average duration. These cycles corresponded to the term of the
business cycle of the Korean economy. The study found that KOSPI returns did not
follow a random walk process and instead followed a deterministic non-linear process
associated with the presence of a long memory property66.

A study entitled, Are South East Asia Countries Capital Markets

Characterized by Nonlinear Structures? An Investigation from Indonesia,
Philippine and Singapore Capital Market Indices, by Minarnita Yanti Verawati
Bakara and Bambang Hermanto (2009), examined the South East Asia capital markets
indices to identify the nonlinearity in daily returns of respective indices viz., Straits
Times Index (STI), Pilipino Stock Exchange Index (PSE) and Jakarta Composite Index.
To test the nonlinearity, BDS statistic and R/S Analysis test were used. The study found
evidences of nonlinearity in all sample index returns. It was found that stock markets of
Indonesia, Singapore and Philippine were not efficient 67.

Svetlana Danilenko (2009), in his study, Long-Term Memory Effect in Stock

Prices Analysis, examined the long term memory in Baltic sector indices. The study
used the R/S analysis to estimate the Hurst Exponent for long range dependence. Hurst
exponent value was greater than 0.5 for the ten sample indices and therefore, the long
term memory effect was found in stock indices of different sample periods. The study
suggested that the participants in the Baltic equity markets might consider the long-
term movements while determining the dynamics of their investment assets68.

Ladislav Kristoufek (2010), in his article entitled, Rescaled Range Analysis

and Detrended Fluctuation Analysis: Finite Sample Properties and Confidence
Intervals, focussed on finite sample properties under two methods of Hurst exponent

66
Seong-M in Yoon & Sang Hoon Kang, (2008). Non Periodic Cycles and Long M emory Propert y in t he
Korean St ock M arket . The Jour nal of t he Korean Economy, 9(3), 403-424.
67
M inarnit a Yant i Verawat i Bakar a & Bambang Her mant o (2009). Are Sout h East Asia Count ries Capit al
M arket s Charact erized by Nonlinear St ruct ures? An Invest igat ion fr om Indonesia, Philippine and
Singapore Capit al M ar ket Indices. Indonesian Capit al M arket Review, 1(1), 1-23.
68
Svet lana Danilenko. (2009). Long-Term M emory Effect in St ock Prices Analysis. Economics &
M anagem ent , 14, 151-155.
31
estimation-Rescaled Range Analysis (R/S) and Detrended Fluctuation Analysis (DFA).
It was found that the comparison with detrended fluctuation analysis, supported the
known fact that R/S overestimated the Hurst exponent and both the methods of Hurst
showed similar results which came closer as the time series became longer 69.
Maria Bohdalova and Michal Gregus (2010), in their research work entitled,
Fractal Analysis of Forward Exchange Rates, analyzed the financial time series
using nonparametric methods. The study used the fractal dimension for measuring the
complexity of time series of observed financial data. To differentiate the randomness
and determinism of the financial information, the study compared the fractal analysis of
the selected forward exchange rates. The study tested fractional dynamic behaviour in a
one month forward exchange rate for USD into GBP (Pound Sterling) and Gold price
against USD. Besides, the fractal structure existed in two forward exchange rates. The
study also witnessed non-periodic cycles in forward exchange rates and suggested that
the currency markets may be nonlinear systems70.
Hardayanna Abd, Rahman and Masnita Misiran (2011), in their paper entitled,
Estimation of Hurst Parameter for Conventional and Islamic Indices, used the
daily returns of conventional indices like The Dow Jones Industrial Average (DJIA),
S&P 500 and The Dow Jones Islamic Market Index (DJIM). Aggregate variance
method, Hinguchi method, Peng method, R/S method and Periodogram method were
used to find Hurst index. The study investigated the long memory properties in these
return series, absolute returns and the squared returns. It was found that there was
significant difference between both the conventional and the Islamic indices in terms of
their respective Hurst value71.
A study by Murugesan Selvam, et al (2011), on Fractal Structure Analysis in
the Indian Stock Market, tested the Fractal Structure in BSE Sensex returns of Indian
stock market. The study analyzed the Fractal Structure in Sensex returns and found that
the trend followed the random walk initially. According to the study, the stock prices
did not reflect the information in the past series of prices. The information was

69
Ladislav Krist oufek. (2010). Rescaled Range Analysis and Det rended Fluct uat ion Analysis: Finit e
Sample Propert ies and Confidence Int ervals, AUCO Czech Economic Review, 4 (3), 315-329.
70
M aria Bohdalova & M ichal Gregus. (2010). Fract al Analysis of Forward Exchange Rat es. Act a
Polyt echnica Hungarica, 7(4), 57-69.
71
Hardayanna Abd, Rahman & M asnit a M isiran, (2011). Est imat ion of Hurst Paramet er for Convent ional
and Islamic Indices. Academy of Taiwan Inf orm at ion Syst ems Research, 8(1), 1-15.
32
assimilated differently by different investment horizons and the information did not
have uniform impact on prices. Thus the study found that the fractal structure existed in
the BSE Sensex and suggested that investors should take their investment decision
based on important information72.
Gayathri M. and Selvam M. (2011a), in their paper entitled, Efficiency of
Fractal Market Hypothesis, studied the efficiency of Fractal Market Hypothesis in the
Indian Stock Market. According to this study, any new information would be
immediately and fully reflected in prices and stock returns of equity. The short term and
long term trade follow technical information and fundamental information respectively.
They have examined the Fractal Brownian Motion, the most useful generic research
model for a random process currently in existence in the financial markets literature.
The use of the Hurst exponent in R/S analysis and conditionally exponential
dependence analysis are also explicated73.
Gayathri M. and Selvam M. (2011b), in their article, Analyzing the Fractal
Structure in the Indian Stock Market with Special Reference to NSE Index,
analyzed the Fractal Structure in the National Stock Exchange of India and examined
the long range dependence of daily returns of Nifty in the stock market. This study
showed that the time series data from Indian Stock Market were not random and the
result indicated the rejection of Efficient Market Hypothesis for Indian Stock Markets.
Using the Rescaled range analysis, the study found that the stock prices did not reflect
the information in the past series of stock prices74.

Malhar Kale and Ferry Butar (2011), in their article entitled, Fractal Analysis of
Time Series and Distribution Properties of Hurst Exponent, examined the
distribution properties of Hurst exponent and examined the Fractal Analysis by
conducting Rescaled Range (R/S) analysis of time series. The study observed that if

72
M urugesan Selvam, Gayat hri Jayapal & Saranya G, (2011). Fract al St ruct ure Analysis in t he Indian
St ock M arket . Elect ronic copy available at ssrn websit e ht t p:/ / ssrn.com/ abst ract 1885030.
73
Gayat hr i M . & Selvam M . (2011a). Efficiency of Fr act al M arket Hypot hesis. Nat ional Conf er ence on
M anagem ent in t he Age of Innovat ion. Arun Vasam Publicat ions, 539-540.
74
Gayat hr i M . & Selvam M , (2011b). Analyzing t he Fract al St ruct ure in t he Indian St ock M arket wit h
Special Ref erence t o NSE index. Int er nat ional Confer ence on Changing Perspect ives of M anagem ent ,
HSI publicat ions. 186-192.
33
time series are randomly generated from a normal distribution, then the estimated Hurst
exponents are also normally distributed75.

A study entitled, Long Memory in Stock Returns: Insights from the Indian
Market by Mukherjee I., et al (2011), analyzed the long range dependence in stock
returns of Indian Stock market. The study used the rescaled range analysis, modified
rescaled range analysis and ARIMA (Autoregressive Integrated Moving Average)
model. The study found that the raw return series did not exhibit any long range
dependence but the absolute and squared returns both showed long range dependence76.

Ritesh Kumar Mishra, et al (2011), in their study entitled, A Search for Long-
Range Dependence and Chaotic Structure in India Stock Market, tested the
presence of nonlinear dependence and deterministic chaos in the rate of returns series
for BSE Sensex, BSE 200, BSE 100, CNX Nifty, CNX IT and Bank Nifty Indices of
Indian stock market. The study found long term dependence evidenced in sample
indices of Indian Stock market and it was found that the existence of long memory in
the market indices could be exploitable and helpful for market players in the Indian
case77.

A paper on, Persistence and Long Range Dependence in Indian Stock

Market Returns, by Gayathri Mahalingam, et al (2012) found evidence of long
memory in the returns from the data collected from Indian Bombay Stock Exchange.
All the measures of Hurst ranged from 0.5 to 1 during 20 months, 30 months, 50
months, 80 months and 120 months and hence that there was persistence in stock
market returns. The index returns of Sensex confirmed persistence during the study
period. It was found that the investors reacted to the information received from past
news and there was high degree of persistence in BSE Sensex returns. Besides, the
study confirmed the persistent behaviour of Sensex returns78.

75
M alhar Kale & Ferry But ar But ar (2011). Fract al Analysis of Time Series and Dist ribut ion Propert ies of
Hurst Exponent . Journal of M at hemat ical Sciences & M at hemat ics Educat ion, 5 (1), 8-19.
76
M ukherjee I., Sen C., & Sarkar C., (2011). Long M emory in St ock Ret ur ns: Insight s from t he Indian
M arket . The Int ernat ional Journal of Applied Economi cs and Finance, 5(1), 62-74.
77
Rit esh Kumar M ishra, Sanjay Sehgal & N.R.Bhanum urt hy, (2011). A Search for Long-Range
Dependence and Chaot ic St ruct ure in India St ock M arket . Review of Financial Economics, 20, 96-104.
78
Gayat hr i M ahalingam, Selvam M ur ugesan & Gayat hri Jayapal, (2012). Persist ence and Long Range
Dependence in Indian St ock M arket Ret ur ns. Int ernat ional Journal of M anagement and Busi ness
St udies, 2(4), 72-77.
34
 According to the study entitled, Long Memory in Stock Returns: A study of
Emerging Stock Markets, by Sharad Nath Bhattacharya and Mousumi Bhattacharya
(2012), examined the long memory properties in ten emerging stock market indices
viz., BUX (Hungary), CSI 300 (China), BOVEPSA (Brazil), IPSA (Chile), KLSE
(Malaysia), KOSPI (Korea), MICEX (Russia), MXX-IPC (Mexico), S&P CNX Nifty
(India) and TWII (Taiwan) across the Globe. The result indicated that all the emerging
stock market returns followed random walk. It was found that there was no evidence of
long term memory in chosen emerging stock market returns. The study suggested that
the financial market regulations in these emerging markets looked into the sources of
long memory of stock returns to improve market efficiency levels79.

The article entitled, Long Range Dependence and Market Efficiency:

Evidence from the Indian Stock Market, by Srikanth Parthasarathy (2013), outlined
the evidence of long range dependence for the indices and many individual stocks in
the Indian stock market used the Hurst Exponent to calculate the range scale statistic.
The analysis of NSE CNX 500 and BSE 500 index exhibited significant long memory
with the Hurst exponent at 0.6. The premier indices, Nifty and Sensex, exhibited
significant long dependence with the Hurst parameter value of 0.57 and 0.58
respectively. The other indices like BSE 100, BSE 200 and NSE 100 exhibited
significant long memory. Nearly 50% of thirty liquid stocks evidenced significant long
memory80.

A study entitled, Evidence of Long Memory in the Indian Stock Market, by

Dilip Kumar and Maheswaran S. (2013), tested the sample indices in estimating the
long range dependence by computing three different approaches, namely, R/S
approach, the R/S AL approach and the Detrending Moving Average (DMA) approach.
Monte Carlo simulation experiment also was used. The study tested the presence of
long memory in daily index returns of S&P CNX Nifty, CNX 100, S&P CNX 500,
CNX Nifty Junior, Nifty Midcap 50 and CNX SMALLCAP from the Indian stock
market. The study examined the dynamic nature of market efficiency in the Indian

79
Sharad Nat h Bhat t acharya & M ousumi Bhat tacharya, (2012). Long M emory in St ock Ret ur ns: A St udy
of Emerging M arket s. Iranian Journal of M anagem ent St udies, 5(2), 67-88.
80
Srikant h Part hasarat hy, (2013). Long Range Dependence and M arket Ef ficiency: Evidence f rom t he
Indian St ock M arket . Indian Journal of Finance, 7(1), 17-25.
35
stock market. The study found that long range dependence existed in the Indian stock
market of six index returns of NSE81.

Gayathri Mahalingam and Murugesan Selvam (2013), in their research work

entitled, Fractal Analysis in the Indian Stock Market with Special Reference to
CNX 500 Index Returns, tested the fractal analysis in the daily index returns of CNX
500 over 2490 observations. The study analyzed the normality by computing
descriptive statistics and examined the evidence of long memory in the data by
analysing rescaled range. The study pointed out that the importance of fractal
dimension which revealed the characteristics in a series of data. The analysis of the
study indicated that the data of index returns were found persistent. Besides, the fractal
dimension was evident in CNX 500 index and during the study period82.

A study on, Long Range Dependence in the Indian Stock Market with
Special Reference to S&P BSE PSU Index, conducted by Mahalingam Gayathri and
Murugesan Selvam (2013), attempted to analyze the long range dependence in the
sample indices of the Indian stock market. Tools like Descriptive statistics, Rescaled
range analysis and fractal dimension were used to analyze the returns distribution. The
study found that there was long term memory in the daily S&P BSE PSU index returns
as the value of Hurst exponent was greater than 0.5 and fractal dimension value was
1.4, which was less than 283.

Mahalingam Gayathri, et al (2013), in their research study on, Fractal

Dimension of S&P CNX Nifty Stock Returns, examined the fractal dimension of
company returns of ITC Limited, Reliance Industries Limited, Infosys Limited, ICICI
Bank Limited and HDFC Limited, listed in the S&P CNX Nifty Index. To detect long
term memory and to predict the prices in the stock, the study used the Rescaled Range
(R/S) Analysis in the stock returns over a period of five years. The long memory was
found for Reliance industries limited, Infosys limited, ICICI bank limited and HDFC

81
Dilip Kumar & M aheswaran S. (2013). Evidence of Long M emory in t he Indian St ock M arket . Asia
Pacif ic Jour nal of M anagem ent Research and Innovat ion, 9(1), 9-21.
82
Gayat hr i M ahalingam & M urugesan Selvam. (2013). Fract al Analysis in t he Indian St ock M arket wit h
Special Refer ence t o CNX 500 Index Ret ur ns. Elect r onic copy available at ht t p:/ / papers.ssr n.com/
sol3/ papers.cfm ?abst ract _id=2325334.
83
M ahalingam Gayat hri & M urugesan Selvam. (2013). Long Range Dependence in t he Indian
St ock M arket wit h Special Ref er ence t o S& P BSE PSU Index. Annamalai Jour nal of M anagem ent ,
6(2),62-65.
36
bank returns series but not found for the ITC limited returns series. The study also
found that the anti-persistent was not constant and the returns of sample companies
indeed displayed periods of persistent behaviour in the daily returns of sample
companies84.

An article on, Fractal Analysis and Long Range Dependence in S&P CNX
Nifty Returns, by Gayathri Mahalingam and Mariappan Raja (2014), investigated the
existence of long range dependence and fractal structure in the S&P CNX Nifty returns.
The results showed the Hurst Exponent with a value of 0.5, which indicates absence of
long memory in Nifty returns. The results of the study also found that the data of CNX
Nifty were not influenced by the past data. Hence the research study suggested the
participants in Nifty may consider the short term movements while determining the
dynamics of their investments85.

The earlier studies focussed on analysing the long range dependence in global
indices and other stock market indices. None of the researchers studied particularly the
BSE Broad Indices. Besides, there was no comprehensive study carried out in Indian
Stock Markets with respect to Bombay Stock Exchange in the recent past. In order to
fill this gap, the present study was undertaken to analyze the long range dependence in
BSE Broad Indices in the Indian context.

84
M ahalingam Gayat hri, M urugesan Selvam, Kasilingam Lingaraja, Vasant h Vinayagamoort hy &
Venkat raman Karpagam. (2013). Fr act al Dimension of S& P CNX Nift y St ock Ret ur ns. Asian Jour nal of
Em pirical Research, 3(9), 1209-1233.
85
Gayat hr i M ahalingam and M ar iappan Raja (2014). Fract al Analysis and Long Range Dependence in
S& P CNX Nift y Ret ur ns. SM ART Jour nal of Business M anagement St udies. 10(2), 88-96.
37
 SECTION - B

2.1. DESIGN OF THE STUDY

2.1.1. Statement of the Problem

The operation of stock market is one among the most volatile financial
institutions in business. The volatility trends tend to be the biggest problem with the
stock markets all over the world. A stock market crash is often defined as a sharp dip in
share prices of equities listed on the stock exchanges. Parallel to various economic
factors, the reasons for stock market crashes are also due to panic and loss of investors’
confidence. Often, the stock market crashes end with speculative economic bubbles.
The new information regarding securities comes to the market in a random fashion and
the timing of one announcement is generally independent of others. The competing
investors attempt to adjust the security prices rapidly to reflect the effect of new
information. If the time horizon of all investors were to become unique, the market
would become unstable because everyone would respond to the information in an
unique fashion.

The stock prices fluctuate daily resulting in a nonlinear pattern. The three
outcomes that occur in the stock market price are rise, fall, or remain the same, which is
uncertain. The Efficient Market Hypothesis (EMH) states if the stock markets are
efficient, opportunities for profit are to be discovered so quickly because otherwise they
cease to be opportunities. The EMH effectively states that no system can continually
beat the market because if this information becomes public, everyone will use it, thus
negating its potential gain. Many researchers argued in their study that Indian markets
are random and index value changes are independent. The past index changes do not
help the investor or analyst to forecast the future. There has been an ongoing debate
about the validity of the EMH and some researchers attempted to use rescaled range
analysis to validate their claims.

Therefore, there have been numerous attempts at modelling a reliable price

predictor. It is to be noted that the varying degrees of awareness of investors across
markets make it difficult to predict the price. This study describes the prediction of
price through fractal model which may prove to be the answer to the problem of
prediction. An attempt has been made in this study to examine the fractal dimension

38
with the help of long range dependence in the Indian Stock Market during pre and post
sub-prime period and the whole study periods.

2.1.2. Scope of the Study

Attempts have been made in the financial literature to find the long range
dependence, using different statistical techniques and in different markets over different
periods. Number of research studies analyzed the stock market returns without
concentrating on sub-prime mortgage crisis. Therefore, the present study analyzes the
long range dependence of the Indian stock market during pre and post sub-prime
mortgage crisis periods and the whole study period for BSE Broad Indices. The study
evaluates normality, stationarity, autocorrelation, long term memory and fractal
dimension of BSE Broad Indices on the basis of daily returns. The study plans to
identify the existence of long range dependence to predict the stock prices and to study
the impact of the sub-prime mortgage crisis on the Indian stock market.

2.1.3 Need of the Study

For more than 30 years, the concept of Efficient Market Hypothesis (EMH) has
dominated the field of research in stock market. The EMH has only one primary
function to justify the use of probability calculus in analyzing capital markets. It is to be
noted that no concept in investment finance has been as widely tested and little believed
as efficient market. The results of various studies in the world have shown that the
stock market may not behave efficiently and the conditions under which the stock
markets behave efficiently, may not be fulfilled. For example, if the markets present
nonlinear dynamic systems, then the use of standard statistical analysis can give
misleading results, particularly if a random walk model is used (Tran Van Quang,
2005)86. Therefore, it is important to study the behaviour of Indian stock market by
using the Fractal Market Analysis (FMA) and rescaling range (R/S) analysis to
distinguish fractal from time series.

86
Tr an Van Quang (2005), The Fract al M arket Analysis and it s Applicat ion on Czech Condit ions. Act a
Oeconomica Pragensi, 13 (1), 101-111.
39
 The test for long memory in the Indian stock market index returns provides
guidance regarding the market efficiency. The long range dependence implies the
predictable arbitrage opportunities. Most of the studies have focused on indices for a
variety of stock markets. However, the study that focuses on Broad Indices is relatively
small. Evaluating whether long range dependence exists in Broad Indices of the stock
market, could help the investors to understand the market reaction. This study intends
to fill this existing gap in the financial literature by studying long range dependence in
respect of six Broad Indices in the Indian Stock Market. As a result of this study,
investors may better understand the systematic pattern of price returns and
consequently, may adjust their asset pricing strategies accordingly. This would give
benefits to the retail investors and practitioners whose success depends on the ability to
forecast the stock price movements. This study may be useful to the stock market
regulators who may look into the sources of long memory in index returns to improve
efficiency levels.

2.1.4. Objectives of the Study

The objectives of this study are as follows:

1. To analyze the normality of the returns of sample indices in the Indian stock
market during pre and post sub-prime mortgage crisis period and the whole study
period.
2. To analyze the stationarity of the returns of sample indices in the Indian stock
market during pre and post sub-prime mortgage crisis period and the whole study
period.
3. To analyze the short-term dependence in the returns of sample indices in the
Indian stock market during pre and post sub-prime mortgage crisis period and the
whole study period.
4. To examine the long range dependence of returns of sample indices in the Indian
stock market during pre and post sub-prime mortgage crisis period and the whole
study period, and
5. To summarize the findings, suggestions and offer the conclusion for the study.

40
2.1.5. Hypotheses of the Study

The following null hypotheses were developed and tested in the study to achieve
the objectives.

NH1 - There is no normality in the returns of BSE Broad Indices.

NH2 - There is no stationarity in the returns of BSE Broad Indices.

NH3 - There is no short term dependence in the returns of BSE Broad Indices.

NH4 - There is no long range dependence in the returns of BSE Broad Indices.

2.1.6. Methodology of the Study

(A) Sample Selection

The sample units for this study were selected on the basis of judgement sampling
method. Indian Stock Market is one of the most dynamic and efficient markets in Asia.
The growth of the equity market in India has been phenomenal in the present decade.
As stated earlier, the Bombay Stock Exchange Ltd is the third largest stock exchange in
the world in terms of market capitalization. Around 5000 companies are listed on BSE,
making it the world's number one exchange in terms of listed members. The BSE Ltd is
the world's fifth most active exchange in terms of number of transactions handled
through its electronic trading system. It is also one of the world’s leading exchanges for
Index options trading (www.world-exchanges.org). Hence BSE was selected for this
study.

As on 31st March 2013, there were four categories of indices (used in BSE)
which include Broad Indices, Investment Strategy Indices, Thematic Indices and
Sectoral Indices. But for the purpose of this study, only one category of index, namely,
BROAD INDICES was selected on the grounds that broad index is most characterized
by stocks from companies of all sizes. The sample indices (Broad Indices) include six
indices, namely, S&P BSE Sensex, S&P BSE MIDCAP, S&P BSE SMALLCAP, S&P
BSE 100, S&P BSE 200 and S&P BSE 500).

(B) Feedback

The experts in the field of stock market and the officials of stock broking
companies were contacted by the Researcher. Their views and valuable information

41
helped the Researcher to validate the findings. Consultations with the experts, helped
the Researcher to finetune the research study. Some of the suggestions offered, were
based on the interaction with the experts.

(C) Sources of Data

The present study was mainly based upon secondary data and used daily index
closing points. The daily returns of indices were collected from the official BSE
website (www.bseindia.com). The other relevant information for this study were
collected from Books, News Papers, Magazines, Research Articles, Reports of
Government and from other various websites.

(D) Sample Period

The present study covered a period of 10 years from April 2003 to March 2013.
In September 2008, the global financial crisis broke out, which had an impact on the
Indian economy. Due to this fact, the whole study period (2003-2013) was divided into
two sample periods (i.e, pre and post sub-prime mortgage crisis) to mainly study the
impact of sub-prime mortgage crisis on Indian stock market as follows:

Whole Period : From 01.04.2003 to 31.03.2013 (10 years)

Sub sample period-I (pre subprime mortgage crisis period)

: From 01.04.2003 to 31.03.2008 (5 years)

Sub sample period-II (post subprime mortgage crisis period)

: From 01.04.2008 to 31.03.2013 (5 years)

It is to be noted that the year 2008 was included in the sub sample period-II
(2008-2013). An attempt has been made in the study to examine the long range
dependence of Indian stock market during pre and post sub-prime mortgage crisis
periods and the whole study period.

(E) Tools used for the analysis

The following tools were used for the purpose of analysis of the returns and long
range dependence for the sample indices taken for this study.

Returns
To compute the daily returns for each of the index series, the following formula
was used:

42
 Rt = (Pt / Pt -1), x 100 ---------------------------------- (1)
Where,
Rt is the rate of return for the period t,
Pt -1 and Pt is the index of two successive periods.

(i) Descriptive statistics

a) Mean
Mean is the average value of the series, obtained by adding up the series and
dividing it by the number of observations. It is the most common Measure of Central
Tendency.

---------------------------------- (2)

Where,
x = represents the mean
∑ = Symbol of summation
Xi =Value of the ith item x, i= 1, 2, 3 ….n
n=total number of items

b) Standard Deviation
The standard deviation is the most common measure of statistical dispersion,
measuring how widely the value in a data set is spread. If many data points are close
to the mean, then the standard deviation is large. If all the data values are equal, then
the standard deviation is zero. The standard deviation of a random variable X is
defined as:

---------------------------------- (3)
Where,
E(X) is the expected value of X
Var(X) is the Variance of X
σ = square root of the variance
N= sample size
∑ = summation of x
43
c) Skewness
Skewness is an indicator used in distribution analysis as a sign of asymmetry and
deviation from a normal distribution.
If the value of
 Skewness > 0 - Right skewed distribution - most values are concentrated on left
of the mean, with extreme values to the right.
 Skewness < 0 - Left skewed distribution - most values are concentrated on the
right of the mean, with extreme values to the left.
 Skewness = 0 - mean = median, the distribution is symmetrical around the mean.
Skewness is a measure of the degree of asymmetry of a distribution. If the left tail (tail
at small end of the distribution) is more pronounced than the right tail (tail is the large
end of distribution), the function is said to have negative skewness. If the reverse is
true, it has positive skewness. If the two are equal, it has zero skewness. The skewness
of a distribution determined by the formula:

---------------------------------- (4)

Where,
µ 3 is the unique symmetric unbiased estimator of the third cumulant
µ 2 is the symmetric unbiased estimator of the second cumulant.

d) Kurtosis
Kurtosis is an indicator used in distribution analysis as a sign of flattening or
"peakedness" of a distribution. If the value of
 Kurtosis > 3 - Leptokurtic distribution, sharper than a normal distribution,
with values concentrated around the mean and thicker tails. This means high
probability for extreme values.
 Kurtosis < 3 - Platykurtic distribution, flatter than a normal distribution with
a wider peak. The probability for extreme values is less than for a normal
distribution, and the values are wider spread around the mean.
 Kurtosis = 3 - Mesokurtic distribution - normal distribution for example.

44
 Kurtosis is the degree of peakedness of a distribution, defined as a normalized
form of the fourth central movement µ 4 of a distribution. There are several flavours
of kurtosis commonly encountered, including the kurtosis proper, denoted β2 or α4
and defined by

---------------------------------- (5)

Where,

µ Î denotes the Îth central moment (and in particular, µ 2 is the variance) (Darius
Singpurwalla, 2013)87.

(ii) Normal Q-Q plot and Kolmogorov-Smirnov and Shapiro-Wilk Test

In statistics, a Q–Q plot graphical method is employed for comparing two

probability distributions by plotting their quantiles against each other. If the two
distributions being compared are similar, the points in the Q–Q plot will approximately
lie on the line y = x. If the distributions are linearly related, the points in the Q–Q plot
will approximately lie on a line, but not necessarily on the line y = x. Q–Q plots can
also be used as a graphical means of estimating parameters in a location-scale family of
distributions.

The Kolmogorov-Smirnov test statistic is defined as

---------------------------------- (6)

Where, F is the theoretical cumulative distribution of the distribution being tested

which must be a continuous distribution (i.e., no discrete distributions such as the
binomial or Poisson), and it must be fully specified (i.e., the location, scale, and
shape parameters cannot be estimated from the data).

87
Darius Singpur walla (2013). A Handbook of St atist ics: An Overview of St at ist ical M et hods,
st
(1 Edit ion), Pearson Educat ion Inc. Ret rieved f rom www.bookboon.com.
45
(iii) Augmented Dickey Fuller Test
In statistics and econometrics, an Augmented Dickey–Fuller Test (ADF) is a
test for a unit root in a time series sample. The more negative it is, the stronger the
rejection of the hypothesis that there is a unit roots at some level of confidence. The
testing procedure for the ADF test is the same as for the Dickey–Fuller Test but it is
applied to the model

----------------- (7)

Where,
α is a constant
β the coefficient on a time trend
p the lag order of the autoregressive process.
By including lags of the order p, the ADF formulation allows for higher-order
autoregressive processes. This means that the lag length p has to be determined while
applying the test. The unit root test is carried out under the null hypothesis γ = 0 against
the alternative hypothesis of γ < 0 (Greene, William H., 2002)88.

(iv) Autocorrelation
In statistics and signal processing, an Auto Regressive (AR) model is a
representation of a type of random process and it describes certain time-varying
processes in nature, economics, etc. The autoregressive model specifies that the output
variable depends linearly on its own previous values. The notation AR(p) refers to the
autoregressive model of order p. The AR(p) model is written

---------------------------------- (8)

Where
are parameters
c is a constant
random variable is white noise

88 th
Greene, William H. (2002). Econom et ric Analysis, (5 Edit ion). Pearson Educat ion Inc. Ret rieved f rom
st at .smmu.edu.cn/ dow nload/ ebook/ economet ric.pdf
46
(v) Rescaled Range Analysis
a) Hurst Exponent
Hurst (1965) developed the Rescaled Range Analysis to analyze long records
of natural phenomena. There are two factors used in this analysis: firstly, the range R,
which is the difference between the minimum and maximum 'accumulated' values or
cumulative sum of X (t,tau)of the natural phenomenon at discrete integer-valued time t
over a time span tau and secondly, the standard deviation S, which is estimated from
the observed values Xi(t). Hurst found that the ratio R/S is described for a large number
of natural phenomena by the following empirical relation.

In (Rn / Sn) – In (c)

H = ________________ ---------------------------- (9)
In (n)
Where,
R / S = Rescaled Range
c = constant (number of intervals)
n = time increment
H = Hurst exponent
b) Fractal Dimension
Fractal Dimension = 2 – H ---------------------------- (10)
Where,
H=Hurst
c) Rescaled Range
R / S = (a*N) H ---------------------------- (11)
Where,
R/S = Rescaled Range
a = constant (number of intervals)
N = Number of observations
H = Hurst Exponent
d) V-Statistic
The V-Statistic takes the following format
Rn / Sn
Vn = ---------------------------- (12)
√n

47
 Where,
Vn = V-Statistic
R / S = Rescaled Range
n = Increment Time

(F) Variables used in the Study

This research covered only two types of variables. The dependent variable
represented logarithmic returns of indices. The independent variable represented the
time period, measured by daily intervals.

2.1.7. Limitations of the Study

The following are the main limitations of the present study.

 The study was confined to only to Broad Indices (SENSEX, MIDCAP,

SMALLCAP, BSE 100, BSE 200 and BSE 500) of Bombay Stock Exchange
Limited.

 As the study was based mainly on secondary data, it was beset with certain
limitations which were bound to arise while dealing exclusively with secondary
data.

 All limitations associated with various tools like Descriptive Statistics, Augmented
Dickey Fuller Test and Rescaled Range Analysis, are applicable to this study also.

 The study focussed only on the existence of short range and long range dependence
for the period covered 10 years during pre and post sub-prime mortgage crisis
period and the whole study period.

 The study focussed on long range dependency of BSE Broad Indices and therefore,
the specific suggestions pertaining to firms are beyond the scope of the study.
However, few suggestions are made from the informal interaction with the experts
in the field of stock market and the officials of stock broking companies.

48
2.1.8. Chapter Scheme of the Study

The present study is organized into six chapters

Chapter-I: Introduction

The First Chapter starts with the Introduction of Stock Exchanges, Fractal Market
Hypothesis and Long Range Dependence in the stock market.

Chapter-II: Review of Literature and Research Design

The review of earlier studies in Fractal Analysis in stock markets and research
design are presented in the Second Chapter. The Research Design of the study
includes the statement of the problem, need of the study, objectives of the study,
hypotheses of the study, sample selection, feedback, period of the study, sources
of data, tools used for the analysis, variables used in the study limitations of the
study and chapter scheme.

Chapter-III: Analysis of Normality and Stationarity in the returns of BSE Broad

Indices

This Chapter explores the return patterns of index value, normality and
stationarity in the data.

Chapter-IV: Analysis of Short Term Dependence in the returns of BSE Broad

Indices

The short term dependence in the Broad Indices has been examined in the Fourth
Chapter. The first sub period covered five years from April 2003 to March 2008,
the second sub period covered five years from April 2008 to March 2013 and the
whole study period covered ten years from April 2003 to March 2013.

Chapter-V: Analysis of Long Range Dependence in the returns of BSE Broad

Indices

The Fifth Chapter analyzes the long range dependence in the Broad Indices and
also the fractal dimension of sample returns for the whole period and the two sub
periods using Rescaled Range Analysis and Hurst Exponent.

Chapter-VI: Summary of Findings, Suggestions and Conclusion

The Final Chapter provides the summary of findings, suggestions of the study
and conclusion.
49