Long range dependence effects and ARCH modelling

Thomas Mikosch and Catalin Starica ()
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Thomas Mikosch: Dept. Actuarial Mathematics, University of Copenhagen

Econometrics from EconWPA

Abstract: Our study supports the hypothesis of global non-stationarity of the return time series. We bring forth both theoretical and empirical evidence that the long range dependence (LRD) type behavior of the sample ACF and the periodogram of absolute return series and the IGARCH effect documented in the econometrics literature could be due to the impact of non-stationarity on statistical instruments and estimation procedures. In particular, contrary to the common-hold belief that the LRD characteristic and the IGARCH phenomena carry meaningful information about the price generating process, these so-called stylized facts could be just artifacts due to structural changes in the data. The effect that the switch to a different regime has on the sample ACF and the periodogram is theoretically explained and empirically documented using time series that were the object of LRD modeling efforts (S&P500, DEM/USD FX) in various publications.

Keywords: sample autocorrelation; change point; GARCH process; long range dependence. (search for similar items in EconPapers)
JEL-codes: C22 C52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-fin
Date: 2004-12-06
Note: Type of Document - pdf; pages: 21
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpem:0412004

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