Large Deviations and the Distribution of Price Changes
The Multifractal Model of Asset Returns (“MMAR,” see Mandelbrot, Fisher, and Calvet, 1997) proposes a class of multifractal processes for the modelling of ﬁnancial returns. In that paper, multifractal processes are deﬁned by a scaling law for moments of the processes’ increments over ﬁnite time intervals. In the present paper, we discuss the local behavior of multifractal processes. We employ local Hölder exponents, a fundamental concept in real analysis that describes the local scaling properties of a realized path at any point in time. In contrast with the standard models of continuous time ﬁnance, multifractal processes contain a multiplicity of local Hölder exponents within any ﬁnite time interval. We characterize the distribution of Hölder exponents by the multifractal spectrum of the process. For a broad class of multifractal processes, this distribution can be obtained by an application of Cramèr’s Large Deviation Theory. In an alternative interpretation, the multifractal spectrum describes the fractal dimension of the set of points having a given local Hölder exponent. Finally, we show how to obtain processes with varied spectra. This allows the applied researcher to relate an empirical estimate of the multifractal spectrum back to a particular construction of the Stochastic process.
Calvet, Laurent; Fisher, Adlai; and Mandelbrot, Benoit, "Large Deviations and the Distribution of Price Changes" (1997). Cowles Foundation Discussion Papers. 1413.