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Testing for Long Memory Against ESTAR Nonlinearities

  • Kuswanto, Heri
  • Sibbertsen, Philipp

We develop a Wald type test to distinguish between long memory and ESTAR nonlinearity by using a directed-Wald statistic to overcome the problem of restricted parameters under the alternative. The test is derived from two basic model specifications where the first is the standard model based on an auxiliary regression and the second allows the parameter to appear as a nuisance parameter in the transition function. A simulation study indicates that both approaches lead to tests with good size and power properties to distinguish between stationary long memory and ESTAR. Moreover, the second approach is shown to have more power.

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Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-427.

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Length: 41 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:han:dpaper:dp-427
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  1. Cheung, Yin-Wong & Lai, Kon S., 2001. "Long memory and nonlinear mean reversion in Japanese yen-based real exchange rates," Journal of International Money and Finance, Elsevier, vol. 20(1), pages 115-132, February.
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  3. Granger, Clive W.J. & Teräsvirta, Timo, 1998. "A simple nonlinear time series model with misleading linear properties," SSE/EFI Working Paper Series in Economics and Finance 237, Stockholm School of Economics.
  4. Georgios Chortareas & George Kapetanios, 2004. "The Yen Real Exchange Rate may be Stationary after all: Evidence from Non-linear Unit-root Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(1), pages 113-131, 02.
  5. Rothe, Christoph & Sibbertsen, Philipp, 2005. "Phillips-Perron-type unit root tests in the nonlinear ESTAR framework," Hannover Economic Papers (HEP) dp-315, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  6. Smallwood Aaron D, 2005. "Joint Tests for Non-linearity and Long Memory: The Case of Purchasing Power Parity," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(2), pages 1-30, June.
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  10. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers.
  11. Mohsen Bahmani-Oskooee & Ali M. Kutan & Su Zhou, 2008. "Do Real Exchange Rates Follow a Nonlinear Mean Reverting Process in Developing Countries," Southern Economic Journal, Southern Economic Association, vol. 74(4), pages 1049-1062, April.
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  16. Andersson, Michael K. & Eklund, Bruno & Lyhagen, Johan, 1999. "A Simple Linear Time Series Model with Misleading Nonlinear Properties," SSE/EFI Working Paper Series in Economics and Finance 300, Stockholm School of Economics.
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