Modeling the time-changing dependence in stock markets

Abstract The time-changing dependence in stock markets is investigated by assuming the multifractional process with random exponent (MPRE) as model for actual log price dynamics. By modeling its functional parameter S ( t ,  ω ) via the square root process (S.R.) a twofold aim is obtained. From one hand both the main financial and statistical properties shown by the estimated S ( t ) are captured by surrogates, on the other hand this capability reveals able to model the time-changing dependence shown by stocks or indexes. In particular, a new dynamical approach to interpreter market mechanisms is given. Empirical evidences are offered by analysing the behaviour of the daily closing prices of a very known index, the Industrial Average Dow Jones (DJIA), beginning on March,1990 and ending on February, 2005.