
Detecting trends and mean reversion with the Hurst exponent
The Hurst exponent is a statistical measure of long-term memory of time series. The existence and form of such memory are of great interest in financial markets, as financial returns are not generally governed by random walks.
The Hurst exponent is a single scalar value that indicates if a time series is purely random, trending, or rather mean reverting. Thus, it can validate either momentum or mean-reverting strategies. The Hurst exponent uses the variance of a log price series to assess the rate of diffusive behavior. If a time series follows a random walk, its variance simply increases linearly with time elapsed. If instead variance increases with time to the power of an exponent, then a low (Hurst) exponent would indicate mean reversion and a high exponent trending behavior. The Hurst exponent depends on the period used for return calculation. For example, monthly returns can display a memory that is different from daily returns.
The Hurst exponent is estimated rather than calculated. Most methods regress rescaled ranges of the return series on the time span of observations. Code examples are available for Python and R.