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Fractional Cointegration In Stochastic Volatility Models

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  • da Silva, Afonso Gonçalves
  • Robinson, Peter M.

Abstract

Asset returns are frequently assumed to be determined by one or more commonfactors. We consider a bivariate factor model, where the unobservable commonfactor and idiosyncratic errors are stationary and serially uncorrelated, but havestrong dependence in higher moments. Stochastic volatility models for the latentvariables are employed, in view of their direct application to asset pricing models.Assuming the underlying persistence is higher in the factor than in the errors, afractional cointegrating relationship can be recovered by suitable transformation ofthe data. We propose a narrow band semiparametric estimate of the factorloadings, which is shown to be consistent with a rate of convergence, and its finitesample properties are investigated in a Monte Carlo experiment.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Econometric Theory.

Volume (Year): 24 (2008)
Issue (Month): 05 (October)
Pages: 1207-1253

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Handle: RePEc:cup:etheor:v:24:y:2008:i:05:p:1207-1253_08

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  1. Celso Brunetti & Christopher L. Gilbert, 1999. "Bivariate FIGARCH and Fractional Cointegration," Working Papers 408, Queen Mary, University of London, School of Economics and Finance.
  2. Clifford Hurvich & Eric Moulines & Philippe Soulier, 2004. "Estimating Long Memory in Volatility," Econometrics 0412006, EconWPA.
  3. Javier Hualde & Peter M Robinson, 2006. "Semiparametric Estimation of Fractional Cointegration," STICERD - Econometrics Paper Series /2006/502, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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Cited by:
  1. Gilles de Truchis & Benjamin Keddad, 2014. "On the Risk Comovements between the Crude Oil Market and the U.S. Dollar Exchange Rates," AMSE Working Papers 1421, Aix-Marseille School of Economics, Marseille, France, revised May 2014.
  2. Afonso Gonçalves da Silva & Peter M Robinson, 2006. "Finite Sample Performance in CointegrationAnalysis of Nonlinear Time Series with LongMemory," STICERD - Econometrics Paper Series /2006/501, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  3. Gilles De Truchis & Benjamin Keddad, 2013. "Analyzing Financial Integration in East Asia through Fractional Cointegration in Volatilities," Working Papers halshs-00862256, HAL.

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