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Breaks or long memory behaviour : An empirical investigation

Are structural breaks models true switching models or long memory processes ? The answer to this question remain ambiguous. A lot of papers, in recent years, have dealt with this problem. For instance, Diebold and Inoue (2001) and Granger and Hyung (2004) show, under specific conditions, that switching models and long memory processes can be easily confused. In this paper, using several generating models like the mean-plus-noise model, the STOchastic Permanent BREAK model, the Markov switching model, the TAR model, the sign model and the Structural CHange model (SCH) and several estimation techiques like the GPH technique, the Exact Local Whittle (ELW) and the Wavelet methods, we show that, if the answer is quite simple in some cases, it can be mitigate in other cases. Using French and American inflation rates, we show that these series cannot be characterized by the same class of models. The main result of this study suggests that estimating the long memory parameter without taking account existence of breaks in the data sets may lead to misspecification and to overestimate the true parameter.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2009/09022.pdf
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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 09022.

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Length: 17 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:mse:cesdoc:09022
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  1. Mark J. Jensen, 1999. "An Approximate Wavelet MLE of Short- and Long-Memory Parameters," Computing in Economics and Finance 1999 1243, Society for Computational Economics.
  2. B. Podobnik & I. Grosse & D. Horvatić & S. Ilic & P. Ch. Ivanov & H. E. Stanley, 2009. "Quantifying cross-correlations using local and global detrending approaches," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 71(2), pages 243-250, September.
  3. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  4. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
  5. Carrasco, Marine, 2002. "Misspecified Structural Change, Threshold, and Markov-switching models," Journal of Econometrics, Elsevier, vol. 109(2), pages 239-273, August.
  6. Gourieroux, Christian & Jasiak, Joann, 2001. "Memory and infrequent breaks," Economics Letters, Elsevier, vol. 70(1), pages 29-41, January.
  7. Hassler, Uwe & Wolters, Jurgen, 1995. "Long Memory in Inflation Rates: International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 37-45, January.
  8. Lee, Jin, 2005. "Estimating memory parameter in the US inflation rate," Economics Letters, Elsevier, vol. 87(2), pages 207-210, May.
  9. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
  10. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  11. Engle, Robert F & Smith, Aaron, 1998. "Stochastic Permanent Breaks," University of California at San Diego, Economics Working Paper Series qt99v0s0zx, Department of Economics, UC San Diego.
  12. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
  13. Chen, Chung & Tiao, George C, 1990. "Random Level-Shift Time Series Models, ARIMA Approximations, and Level-Shift Detection," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 83-97, January.
  14. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
  15. Carrion-i-Silvestre, Josep Lluís & Kim, Dukpa & Perron, Pierre, 2009. "Gls-Based Unit Root Tests With Multiple Structural Breaks Under Both The Null And The Alternative Hypotheses," Econometric Theory, Cambridge University Press, vol. 25(06), pages 1754-1792, December.
  16. Granger, Clive W. J. & Terasvirta, Timo, 1999. "A simple nonlinear time series model with misleading linear properties," Economics Letters, Elsevier, vol. 62(2), pages 161-165, February.
  17. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  18. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  19. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November.
  20. Doornik Jurgen A & Ooms Marius, 2004. "Inference and Forecasting for ARFIMA Models With an Application to US and UK Inflation," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(2), pages 1-25, May.
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