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Bivariate FIGARCH and Fractional Cointegration

  • Celso Brunetti

    (University of Edinburgh)

  • Christopher L. Gilbert

    (Queen Mary and Westfield College, University of London)

We consider the modelling of volatility on closely related markets. Univariate fractional volatility (FIGARCH) models are now standard, as are multivariate GARCH models. In this paper we adopt a combination of the two methodologies. There is as yet little consensus on the methodology for testing for fractional cointegration. The contribution of this paper is to demonstrate the feasibility of estimating and testing cointegrated bivariate FIGARCH models. We apply these methods to volatility on the NYMEX and IPE crude oil markets. We find a common order of fractional integration for the two volatility processes and confirm that they are fractionally cointegrated. An estimated error correction FIGARCH model indicates that the preponderant adjustment is of the IPE towards NYMEX.

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File URL: http://www.econ.qmul.ac.uk/papers/doc/wp408.pdf
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Paper provided by Queen Mary University of London, School of Economics and Finance in its series Working Papers with number 408.

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Date of creation: Dec 1999
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Handle: RePEc:qmw:qmwecw:wp408
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