What is the Joseph Effect?
The Joseph Effect is a statistical measure that indicates whether certain price movements are part of a long-term trend.
How Does the Joseph Effect Work?
The Joseph effect is really a description of the Hurst exponent, which is a measure of how much a series of prices are correlated with each other. When the Hurst exponent is between 0 and 0.5, we say that the items in the series aren't very correlated with each other and thus don't signal a long-term trend; when the Hurst exponent is above 0.5, we say that the items in the series are correlated with each other and thus signal that the prices in the series are part of a long-term trend.
Why Does the Joseph Effect Matter?
When the Hurst exponent is above 0.5, we say there is a Joseph Effect going on with the items in the time series -- that is, there is a long-term trend at work. The term is named after a biblical story in which Pharoah asks Joseph to interpret one of his dreams. Pharaoh dreamt of seeing seven fat cows and seven skinny cows, which Joseph said was a warning that Egypt would soon experience seven years of plenty followed by seven years of famine. The seven years of plenty came, during which Egypt prepared for the famine by saving grain and supplies; when the famine arrived, it was ready.
