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Accounting for outliers and calendar effects in surrogate simulations of stock return sequences

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  • Leontitsis, Alexandros
  • Vorlow, Constantinos E.

Abstract

Surrogate data analysis (SDA) is a statistical hypothesis testing framework for the determination of weak chaos in time series dynamics. Existing SDA procedures do not account properly for the rich structures observed in stock return sequences, attributed to the presence of heteroscedasticity, seasonal effects and outliers. In this paper we suggest a modification of the SDA framework, based on the robust estimation of location and scale parameters of mean-stationary time series and a probabilistic framework which deals with outliers. A demonstration on the NASDAQ Composite index daily returns shows that the proposed approach produces surrogates that faithfully reproduce the structure of the original series while being manifestations of linear-random dynamics.

Suggested Citation

  • Leontitsis, Alexandros & Vorlow, Constantinos E., 2006. "Accounting for outliers and calendar effects in surrogate simulations of stock return sequences," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 368(2), pages 522-530.
    • Handle: RePEc:eee:phsmap:v:368:y:2006:i:2:p:522-530
    DOI: 10.1016/j.physa.2005.12.037
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