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Testing for Long Memory in Potentially Nonstationary Perturbed Fractional Processes

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  • Per Frederiksen
  • Frank S. Nielsen

Abstract

In this article, we propose new tests for long memory in stationary and nonstationary time series possibly perturbed by short-run noise. The tests are all based on semiparametric estimators and exploit the self-similarity property of long memory processes. We offer simulation results that show good size properties of the tests, with power against spurious long memory. To improve the potential size distortion in small samples from using temporal aggregation we use a bootstrap procedure. An empirical study of daily log-squared returns series of exchange rates and DJIA30 stocks shows that indeed there is long memory in exchange rate volatility and stock return volatility. (JEL C14, C22, C43)

Suggested Citation

  • Per Frederiksen & Frank S. Nielsen, 2014. "Testing for Long Memory in Potentially Nonstationary Perturbed Fractional Processes," Journal of Financial Econometrics, Oxford University Press, vol. 12(2), pages 329-381.
    • Handle: RePEc:oup:jfinec:v:12:y:2014:i:2:p:329-381.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbs027
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    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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