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Level Shifts and the Illusion of Long Memory in Economic Time Series

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  • Smith, Aaron

Abstract

When applied to time series processes containing occasional level shifts, the logperiodogram (GPH) estimator often erroneously finds long memory. For a stationary short-memory process with a slowly varying level, I show that the GPH estimator is substantially biased, and I derive an approximation to this bias. The asymptotic bias lies on the (0,1) interval, and its exact value depends on the ratio of the expected number of level shifts to a user-defined bandwidth parameter. Using this result, I formulate the Modified GPH estimator, which has a markedly lower bias. I illustrate this new estimator via applications to soybean prices and stock market volatility.

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Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 23 (2005)
Issue (Month): (July)
Pages: 321-335

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Handle: RePEc:bes:jnlbes:v:23:y:2005:p:321-335

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