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Testing the covariance stationarity of CEE stocks

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  • Lyócsa, Štefan
  • Baumöhl, Eduard

Abstract

This paper investigates whether the daily stock returns of the Polish, Czech and Hungarian stock markets are covariance stationary. Using the Pagan – Schwert (1990) and Loretan – Phillips (1994) testing procedures, we show that contrary to the widely accepted assumption of covariance stationarity, the stock returns in Central and Eastern European (CEE) stock markets do not appear to be covariance stationary. Our results further suggest that the occurrence of unconditional volatility shifts appears to be synchronized across stocks.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43432.

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Date of creation: 26 Dec 2012
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Handle: RePEc:pra:mprapa:43432

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Keywords: covariance stationarity; unconditional volatility; volatility regimes; CEE stock markets;

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  1. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(4), pages 631-53, October.
  2. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, Elsevier, vol. 54(1-3), pages 159-178.
  3. G. William Schwert, 1988. "Tests For Unit Roots: A Monte Carlo Investigation," NBER Technical Working Papers 0073, National Bureau of Economic Research, Inc.
  4. Loretan, Mico & Phillips, Peter C. B., 1994. "Testing the covariance stationarity of heavy-tailed time series: An overview of the theory with applications to several financial datasets," Journal of Empirical Finance, Elsevier, Elsevier, vol. 1(2), pages 211-248, January.
  5. Pagan, Adrian R. & Schwert, G. William, 1990. "Testing for covariance stationarity in stock market data," Economics Letters, Elsevier, Elsevier, vol. 33(2), pages 165-170, June.
  6. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 817-58, May.
  7. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 813-36, July.
  8. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1519-1554, November.
  9. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 34(01), pages 33-55, March.
  10. Cheung, Yin-Wong & Lai, Kon S, 1995. "Lag Order and Critical Values of a Modified Dickey-Fuller Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(3), pages 411-19, August.
  11. Perron, Pierre & Qu, Zhongjun, 2007. "A simple modification to improve the finite sample properties of Ng and Perron's unit root tests," Economics Letters, Elsevier, Elsevier, vol. 94(1), pages 12-19, January.
  12. Bradley T. Ewing & Farooq Malik, 2010. "Estimating Volatility Persistence in Oil Prices Under Structural Breaks," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 45(4), pages 1011-1023, November.
  13. Výrost, Tomáš & Baumöhl, Eduard & Lyócsa, Štefan, 2011. "On the relationship of persistence and number of breaks in volatility: new evidence for three CEE countries," MPRA Paper 27927, University Library of Munich, Germany.
  14. Cook, Steven & Manning, Neil, 2004. "Lag optimisation and finite-sample size distortion of unit root tests," Economics Letters, Elsevier, Elsevier, vol. 84(2), pages 267-274, August.
  15. Bart Hobijn & Philip Hans Franses & Marius Ooms, 2004. "Generalizations of the KPSS-test for stationarity," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, Netherlands Society for Statistics and Operations Research, vol. 58(4), pages 483-502.
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Cited by:
  1. Výrost, Tomáš, 2012. "Country effects in CEE3 stock market networks: a preliminary study," MPRA Paper 43481, University Library of Munich, Germany.

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