Robustness and spurious long memory: evidence from the generalized autoregressive score models

This paper employs the generalized autoregressive score (GAS) models to study the long memory and regime switching in the second comment. Via systematically constructed simulation studies, we firstly demonstrate the desirable robustness of both the long memory GAS (LMGAS) and Markov switching GAS (MS-GAS) models against outliers. Despite this, the LMGAS model still produces significant and spurious long memory, when the pure regime-switching processes are fitted. An illustrative cause of such spuriousness is further provided, which suggests an effective solution needs to accommodate both long memory and regime switching. Motivated from this, we propose an MS-LMGAS model and provide comprehensive simulation evidence on its effectiveness to resolve the spurious long memory and robustness against outliers. An empirical study of the West Texas Intermediate crude oil spot returns is then conducted, which contain historical-writing movements deemed as large outliers. Our empirical findings support the superiority of the new model over both the existing GAS and GARCH models. It is further verified that significant long memory only exists in the high-volatility state. Important financial implications are described to improve the risk management operations in practice.