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On the statistics of scaling exponents and the Multiscaling Value at Risk

Research output: Contribution to journalArticlepeer-review

Original languageEnglish
JournalThe European Journal of Finance
Volume2021
Early online date2 Apr 2021
DOIs
Accepted/In press15 Mar 2021
E-pub ahead of print2 Apr 2021

King's Authors

Abstract

Research on scaling analysis in finance is vast and still flourishing. We introduce a novel statistical procedure based on the generalized Hurst exponent, the Relative Normalized and Standardized Generalized Hurst Exponent (RNSGHE), to robustly estimate and test the multiscaling property. Furthermore, we introduce a new tool to estimate the optimal aggregation time used in our methodology which we name Autocororrelation Segmented Regression. We numerically validate this procedure on simulated time series by using the Multifractal Random Walk and we then apply it to real financial data. We present results for times series with and without anomalies and we compute the bias that such anomalies introduce in the measurement of the scaling exponents. We also show how the use of proper scaling and multiscaling can ameliorate the estimation of risk measures such as Value at Risk (VaR). Finally, we propose a methodology based on Monte Carlo simulation, which we name Multiscaling Value at Risk (MSVaR), that takes into account the statistical properties of multiscaling time series. We mainly show that by using this statistical procedure in combination with the robustly estimated multiscaling exponents, the one year forecasted MSVaR mimics the VaR on the annual data for the majority of the stocks.

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