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Simple (but effective) tests of long memory versus structural breaks

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Author Info
Katsumi Shimotsu () (Department of Economics, Queen's University)

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Abstract

This paper proposes two simple tests that are based on certain time domain properties of I(d) processes. First, if a time series follows an I(d) process, then each subsample of the time series also follows an I(d) process with the same value of d. Second, if a time series follows an I(d) process, then its dth differenced series follows an I(0) process. Simple as they may sound, these properties provide useful tools to distinguish between true and spurious I(d) processes. In the first test, we split the sample into b subsamples, estimate d for each subsample, and compare them with the estimate of d from the full sample. In the second test, we estimate d, use the estimate to take the dth difference of the sample, and apply the KPSS test and Phillips-Perron test to the differenced data and its partial sum. Both tests are applicable to both stationary and nonstationary I(d) processes. Simulations show that the proposed tests have good power against the spurious long memory models considered in the literature. The tests are applied to the daily realized volatility of the S&P 500 index.

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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1101.pdf
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1101.

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Length: 44 pages
Date of creation: Dec 2006
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Handle: RePEc:qed:wpaper:1101

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Related research
Keywords: long memory fractional integration structural breaks realized volatility

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sergio Da Silva & Raul Matsushita & Iram Gleria & Annibal Figueiredo, 2007. "Hurst exponents, power laws, and efficiency in the Brazilian foreign exchange market," Economics Bulletin, Economics Bulletin, vol. 7(1), pages 1-11. [Downloadable!]
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