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Fractional Cointegration In StochasticVolatility Models

  • Afonso Gonçalves da Silva
  • Peter M Robinson

Asset returns are frequently assumed to be determined by one or more commonfactors. We consider a bivariate factor model, where the unobservable commonfactor and idiosyncratic errors are stationary and serially uncorrelated, but havestrong dependence in higher moments. Stochastic volatility models for the latentvariables are employed, in view of their direct application to asset pricing models.Assuming the underlying persistence is higher in the factor than in the errors, afractional cointegrating relationship can be recovered by suitable transformation ofthe data. We propose a narrow band semiparametric estimate of the factorloadings, which is shown to be consistent with a rate of convergence, and its finitesample properties are investigated in a Monte Carlo experiment.

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File URL: http://sticerd.lse.ac.uk/dps/em/em519.pdf
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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Econometrics Paper Series with number /2007/519.

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Date of creation: May 2007
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Handle: RePEc:cep:stiecm:/2007/519
Contact details of provider: Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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  1. Andrew Harvey (ed.), 1994. "Time Series," Books, Edward Elgar, volume 0, number 599.
  2. Clifford M. Hurvich & Eric Moulines & Philippe Soulier, 2005. "Estimating Long Memory in Volatility," Econometrica, Econometric Society, vol. 73(4), pages 1283-1328, 07.
  3. Bent Jesper Christensen & Morten Ø. Nielsen, . "Semiparametric Analysis of Stationary Fractional Cointegration and the Implied-Realized Volatility Relation in High-Frequency Options Data," Economics Working Papers 2001-4, School of Economics and Management, University of Aarhus.
  4. Javier Hualde & Peter Robinson, . "Semiparametric Estimation of Fractional Cointegration," Faculty Working Papers 07/06, School of Economics and Business Administration, University of Navarra.
  5. Brunetti, Celso & Gilbert, Christopher L., 2000. "Bivariate FIGARCH and fractional cointegration," Journal of Empirical Finance, Elsevier, vol. 7(5), pages 509-530, December.
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