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Long range dependence effects and ARCH modelling

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Author Info

  • Thomas Mikosch

    (Dept. Actuarial Mathematics, University of Copenhagen)

  • Catalin Starica

    (Dept. Mathematical Statistics & Economics, Gothenburg University & CTH)

Abstract

Our study supports the hypothesis of global non-stationarity of the return time series. We bring forth both theoretical and empirical evidence that the long range dependence (LRD) type behavior of the sample ACF and the periodogram of absolute return series and the IGARCH effect documented in the econometrics literature could be due to the impact of non-stationarity on statistical instruments and estimation procedures. In particular, contrary to the common-hold belief that the LRD characteristic and the IGARCH phenomena carry meaningful information about the price generating process, these so-called stylized facts could be just artifacts due to structural changes in the data. The effect that the switch to a different regime has on the sample ACF and the periodogram is theoretically explained and empirically documented using time series that were the object of LRD modeling efforts (S&P500, DEM/USD FX) in various publications.

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File URL: http://128.118.178.162/eps/em/papers/0412/0412004.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 0412004.

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Length: 21 pages
Date of creation: 06 Dec 2004
Date of revision:
Handle: RePEc:wpa:wuwpem:0412004

Note: Type of Document - pdf; pages: 21
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Web page: http://128.118.178.162

Related research

Keywords: sample autocorrelation; change point; GARCH process; long range dependence.;

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Cited by:
  1. Lahiani, Amine & Yousfi, Ouidad, 2007. "Modèls Garch à la mémoire longue: application aux taux de change tunisiens
    [GARCH models : evidence from Tunisian Exchange market]
    ," MPRA Paper 28702, University Library of Munich, Germany, revised 2008.
  2. Ibrahim Ahamada & Jamel Jouini & Mohamed Boutahar, 2004. "Detecting multiple breaks in time series covariance structure: a non-parametric approach based on the evolutionary spectral density," Applied Economics, Taylor & Francis Journals, vol. 36(10), pages 1095-1101.
  3. Erlandsson, Ulf, 2002. "Regime Switches in Swedish Interest Rates," Working Papers 2002:5, Lund University, Department of Economics, revised 26 Aug 2003.

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