Modern Paradigm Regarding Capital Markets: Fractal Market Hypothesis. Determination of the Hurst Exponent on the Romanian Capital Market

Abstract

Classical statistical and econometric theory, intended to provide functional forecasting models in capital markets, is the mathematical foundation for a number of theories - efficient market theory, Harry Markowitz's optimized portfolio theory, the CAPM model developed by Sharpe, and the modern theory of portfolio - Modern Portfolio Theory (MPT). Although capital markets are considered at their best to be efficient, in real world, testing their efficiency proved eroneous. As the concept applies normally to random processes, or Brownian motions. But in very rare moments markets are efficient (weak or strong form of efficieny), rather than they follow fractional Brownian motions. In other words, for this particular type of process, the memory effect over the price is encompassed. For determining which cathegory of process the price may follow, R/S Analysis is a robust tool for testing whether a historical price series, for certain time interval, follows a Brownian motion or there is some memory effect over it. Determining the Hurst exponent for company ALRO S.A., for a the period of time since listing, until 16/07/2021 was the aim of this paper. Values of the Hurst Exponenent indicate important information regarding memory effect inside the stock market, or appearance of some random process. As a conclusion,  Romanian capital market has evolved from a very low stability market to a more stable investment environment, meaning increasing liquidity over the market.