Long-range correlations and nonstationarity in the Brazilian stock market

TL;DR

This paper empirically investigates long-range correlations in the Brazilian stock market, revealing a transition to more efficient market behavior post-1990 reforms using a novel analysis method.

Contribution

It introduces a rescaled Detrended Fluctuation Analysis to measure the Hurst exponent and demonstrates its time variation related to economic reforms.

Findings

Hurst exponent remains above 1/2 before 1990

Post-1990, H(t) stays close to 1/2 indicating increased efficiency

Market reforms correlate with changes in long-range correlations

Abstract

We report an empirical study of the Ibovespa index of the Sao Paulo Stock Exchange in which we detect the existence of long-range correlations. To analyze our data we introduce a rescaled variant of the usual Detrended Fluctuation Analysis that allows us to obtain the Hurst exponent through a one-parameter fitting. We also compute a time-dependent Hurst exponent H(t) using three-year moving time windows. In particular, we find that before the launch of the Collor Plan in 1990 the curve H(t) remains, in general, well above 1/2, while afterwards it stays close to 1/2. We thus argue that the structural reforms set off by the Collor Plan has lead to a more efficient stock market in Brazil. We also suggest that the time dependence of the Ibovespa Hurst exponent could be described in terms of a multifractional Brownian motion.