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Long memory and regime switching

  • Diebold, Francis X.
  • Inoue, Atsushi

The theoretical and empirical econometric literatures on long memory and regime switching have evolved largely independently, as the phenomena appear distinct. We argue, in contrast, that they are intimately related, and we substantiate our claim in several environments, including a simple mixture model, Engle and Lee's (1999) stochastic permanent break model, and Hamilton's (1989) Markov switching model. In particular, we show analytically that stochastic regime switching is easily confused with long memory, even asymptotically, so long as only a small' amount of regime switching occurs, in a sense that we make precise. A Monte Carlo analysis supports the relevance of the theory and produces additional insights.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 105 (2001)
Issue (Month): 1 (November)
Pages: 131-159

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Handle: RePEc:eee:econom:v:105:y:2001:i:1:p:131-159
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  8. Chen, Xiaohong & Hansen, Lars Peter & Carrasco, Marine, 2010. "Nonlinearity and temporal dependence," Journal of Econometrics, Elsevier, vol. 155(2), pages 155-169, April.
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  19. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
  20. Allan Timmermann, 1999. "Moments of Markov Switching Models," FMG Discussion Papers dp323, Financial Markets Group.
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