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Testing for strict stationarity in financial variables

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  • Kapetanios, George

Abstract

This paper considers the stationarity properties of a variety of financial variables using statistical tests for strict stationarity. We find that there has been a gradual shift in unconditional variances for the variables examined during the 90's and 2000's and that this is the main cause of the widespread rejection of the strict stationarity null hypothesis. This is a powerful result which suggests that the consideration of conditional mean and, especially, conditional variance models which assume stationarity is problematic for the period under examination. This casts serious doubts on the usefulness of models that assume strict stationarity and model conditional second moments, such as GARCH and stochastic volatility models.

Suggested Citation

  • Kapetanios, George, 2009. "Testing for strict stationarity in financial variables," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2346-2362, December.
  • Handle: RePEc:eee:jbfina:v:33:y:2009:i:12:p:2346-2362
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    References listed on IDEAS

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    Cited by:

    1. George Kapetanios & Fotis Papailias, 2011. "Block Bootstrap and Long Memory," Working Papers 679, Queen Mary University of London, School of Economics and Finance.
    2. Zacharias Psaradakis & Marián Vávra, 2015. "A Quantile-based Test for Symmetry of Weakly Dependent Processes," Journal of Time Series Analysis, Wiley Blackwell, vol. 36(4), pages 587-598, July.
    3. Schäfer, Rudi & Guhr, Thomas, 2010. "Local normalization: Uncovering correlations in non-stationary financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(18), pages 3856-3865.
    4. Wang, Zijun, 2010. "Dynamics and causality in industry-specific volatility," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1688-1699, July.
    5. Dichtl, Hubert & Drobetz, Wolfgang, 2011. "Portfolio insurance and prospect theory investors: Popularity and optimal design of capital protected financial products," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1683-1697, July.

    More about this item

    Keywords

    S&P500 Covariance stationarity Strict stationarity;

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    Statistics

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