Measuring the self-similarity exponent in Lévy stable processes of financial time series

Geometric method-based procedures, which will be called GM algorithms herein, were introduced in [M.A. Sلnchez Granero, J.E. Trinidad Segovia, J. Garcيa Pérez, Some comments on Hurst exponent and the long memory processes on capital markets, Phys. A 387 (2008) 5543-5551], to efficiently calculate the self-similarity exponent of a time series. In that paper, the authors showed empirically that these algorithms, based on a geometrical approach, are more accurate than the classical algorithms, especially with short length time series. The authors checked that GM algorithms are good when working with (fractional) Brownian motions. Moreover, in [J.E. Trinidad Segovia, M. Fernلndez-Martيnez, M.A. Sلnchez-Granero, A note on geometric method-based procedures to calculate the Hurst exponent, Phys. A 391 (2012) 2209-2214], a mathematical background for the validity of such procedures to estimate the self-similarity index of any random process with stationary and self-affine increments was provided. In particular, they proved theoretically that GM algorithms are also valid to explore long-memory in (fractional) Lévy stable motions. s paper, we prove empirically by Monte Carlo simulation that GM algorithms are able to calculate accurately the self-similarity index in Lévy stable motions and find empirical evidence that they are more precise than the absolute value exponent (denoted by AVE onwards) and the multifractal detrended fluctuation analysis (MF-DFA) algorithms, especially with a short length time series. We also compare them with the generalized Hurst exponent (GHE) algorithm and conclude that both GM2 and GHE algorithms are the most accurate to study financial series. In addition to that, we provide empirical evidence, based on the accuracy of GM algorithms to estimate the self-similarity index in Lévy motions, that the evolution of the stocks of some international market indices, such as U.S. Small Cap and Nasdaq100, cannot be modelized by means of a Brownian motion.