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Testing Mean Stability of Heteroskedastic Time Series

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Abstract

Time series models are often fitted to the data without preliminary checks for stability of the mean and variance, conditions that may not hold in much economic and financial data, particularly over long periods. Ignoring such shifts may result in fitting models with spurious dynamics that lead to unsupported and controversial conclusions about time dependence, causality, and the effects of unanticipated shocks. In spite of what may seem as obvious differences between a time series of independent variates with changing variance and a stationary conditionally heteroskedastic (GARCH) process, such processes may be hard to distinguish in applied work using basic time series diagnostic tools. We develop and study some practical and easily implemented statistical procedures to test the mean and variance stability of uncorrelated and serially dependent time series. Application of the new methods to analyze the volatility properties of stock market returns leads to some unexpected surprising findings concerning the advantages of modeling time varying changes in unconditional variance.

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  • Violetta Dalla & Liudas Giraitis & Peter C. B. Phillips, 2015. "Testing Mean Stability of Heteroskedastic Time Series," Cowles Foundation Discussion Papers 2006, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:2006
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    File URL: http://cowles.yale.edu/sites/default/files/files/pub/d20/d2006.pdf
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    Keywords

    Heteroskedasticity; KPSS test; Mean stability; Variance stability; VS test;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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