14.2 Hurst and Rescaled Range Analysis

Hurst (-) was an English hydrologist, who worked in the early th century on the Nile River Dam project. When designing a dam, the yearly changes in water level are of particular concern in order to adapt the dam's storage capacity according to the natural environment. Studying an Egyptian -year record of the Nile River's overflows, Hurst observed that flood occurrences could be characterized as persistent, i.e. heavier floods were accompanied by above average flood occurrences, while below average occurrences were followed by minor floods. In the process of this findings he developed the Rescaled Range (R/S) Analysis.

We observe a stochastic process at
time points
. Let be an integer that is small
relative to , and let denote the integer
part of . Divide the
`interval' into consecutive `subintervals', each of length and
with overlapping endpoints.
In every subinterval correct the original datum for location, using
the mean slope of the process in the subinterval, obtaining
for all with
and for all
.
Over the 'th subinterval
, for
, construct the
smallest box (with sides parallel to the coordinate axes) such that the box
contains all the fluctuations of
that occur within
. Then, the
height of the box equals

Figure 14.1 illustrates the procedure. Let denote the empirical standard error of the variables , for . If the process is stationary then varies little with ; in other cases, dividing by corrects for the main effects of scale inhomogeneity in both spatial and temporal domains.

The total area of the boxes, corrected for scale, is proportional in to

If the process is stationary then correction for scale is not strictly necessary, and we may take each to be the constant 1. In that case the R-S statistic is a version of the box-counting estimator that is widely used in physical science applications, Carter et al. (1988), Sullivan and Hunt (1988) and Hunt (1990). The box-counting estimator is related to the capacity definition of fractal dimension, Barnsley (1988) p. 172ff, and the R-S estimator may be interpreted in the same way. Statistical properties of the box-counting estimator have been discussed by Hall and Wood (1993).

A more detailed analysis, exploiting dependence among the errors in the regression of on , may be undertaken in place of R-S analysis. See Kent and Wood (1997) for a version of this approach in the case where scale correction is unnecessary. However, as Kent and Wood show, the advantages of the approach tend to be asymptotic in character, and sample sizes may need to be extremely large before real improvements are obtained.

Hurst used the coefficient as an index for the persistence of the time series considered. For , it is positively persistent and characterized by `long memory' effects, as described in the next section. A rather informal interpretation of used by practitioners is this: may be interpreted as the chance of movements with the same sign, Peters (1994). For , it is more likely that an upward movement is followed by a movement of the same (positive) sign, and a downward movement is more likely to be followed by another downward movement. For , a downward movement is more likely to be reversed by an upward movement thus implying the reverting behavior.