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Volatility of Stock Market and Exchange Rate Returns in Peru: Long Memory or Short Memory with Level Shifts?

Listed author(s):
  • Andres Herrera

    ( Departamento de Economía - Pontificia Universidad Católica del Perú)

  • Gabriel Rodríguez

    ( Departamento de Economía - Pontificia Universidad Católica del Perú)

Though the econometrics literature on this area is extensive, in Peru few studies have been dedicated to the analysis of Önancial returns in general and volatility in particular. As part of an empirical research agenda suggested by Humala and RodrÌguez (2013), this paper represents one of the Örst attempts to distinguish between long- and short-memory (with level shifts) in volatility of Peruís stock market and exchange rate returns. We utilize the statistical approach put forward by Perron and Qu (2010). The data is end-of-day and span the period January 3, 1990 to June 13, 2013 (5,831 observations) for the stock market returns, and January, 3 1997 until June 24, 2013 (4,110 observations) for exchange rate returns. The analysis of the ACF, the periodogram and the fractional parameter estimation for the two volatilities suggest that the theoretical predictions of Perron and Quís simple mixture model (2010) are correct. The results are more conclusive for stock market volatility in comparison with those of the exchange rate. The application of one of the statistics employed by Perron and Qu (2010) suggest the rejection of a long-memory hypothesis for both volatilities. Nonetheless, the other statistics provide weak evidence against the null hypothesis, above all for the exchange rate market. To reinforce the Öndings, some results associated with other investigations are presented. JEL Classification-JEL: C22

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File URL: http://files.pucp.edu.pe/departamento/economia/DDD393.pdf
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Paper provided by Departamento de Economía - Pontificia Universidad Católica del Perú in its series Documentos de Trabajo / Working Papers with number 2014-393.

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Length: 24 pages
Date of creation: 2014
Publication status: published
Handle: RePEc:pcp:pucwps:wp00393
Contact details of provider: Postal:
Av. Universitaria 1801, San Miguel, Lima, Perú

Phone: (511) 626-2000 ext. 4950, 4951
Fax: (511) 626-2874
Web page: http://departamento.pucp.edu.pe/economia/
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  1. Lobato, Ignacio N & Savin, N E, 1998. "Real and Spurious Long-Memory Properties of Stock-Market Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 261-268, July.
  2. Humala, Alberto & Rodriguez, Gabriel, 2010. "Some stylized facts of returns in the foreign exchange and stock markets in Peru," Working Papers 2010-017, Banco Central de Reserva del Perú.
  3. 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.
  4. Lu, Yang K. & Perron, Pierre, 2010. "Modeling and forecasting stock return volatility using a random level shift model," Journal of Empirical Finance, Elsevier, vol. 17(1), pages 138-156, January.
  5. Granger, Clive W. J. & Hyung, Namwon, 2004. "Occasional structural breaks and long memory with an application to the S&P 500 absolute stock returns," Journal of Empirical Finance, Elsevier, vol. 11(3), pages 399-421, June.
  6. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  7. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November.
  8. Perron, Pierre & Qu, Zhongjun, 2010. "Long-Memory and Level Shifts in the Volatility of Stock Market Return Indices," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(2), pages 275-290.
  9. Qu, Zhongjun, 2011. "A Test Against Spurious Long Memory," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(3), pages 423-438.
  10. Renzo Pardo Figueroa & Gabriel Rodríguez, 2014. " Distinguishing between True and Spurious Long Memory in the Volatility of Stock Market Returns in Latin America," Documentos de Trabajo / Working Papers 2014-395, Departamento de Economía - Pontificia Universidad Católica del Perú.
  11. 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.
  12. 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 357-384, March.
  13. Engle, Robert F. & White (the late), Halbert (ed.), 1999. "Cointegration, Causality, and Forecasting: Festschrift in Honour of Clive W. J. Granger," OUP Catalogue, Oxford University Press, number 9780198296836.
  14. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
  15. Lobato, Ignacio N & Savin, N E, 1998. "Real and Spurious Long-Memory Properties of Stock-Market Data: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 280-283, July.
  16. Pierre Perron & Zhongjun Qu, 2007. "An Analytical Evaluation of the Log-periodogram Estimate in the Presence of Level Shifts," Boston University - Department of Economics - Working Papers Series wp2007-044, Boston University - Department of Economics.
  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.
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