Accounting for outliers and calendar effects in surrogate simulations of stock return sequences

Alexandros Leontitsis and Constantinos E. Vorlow

Physica A: Statistical Mechanics and its Applications, 2006, vol. 368, issue 2, 522-530

Abstract: Surrogate data analysis (SDA) is a statistical hypothesis testing framework for the determination of weak chaos in time series dynamics. Existing SDA procedures do not account properly for the rich structures observed in stock return sequences, attributed to the presence of heteroscedasticity, seasonal effects and outliers. In this paper we suggest a modification of the SDA framework, based on the robust estimation of location and scale parameters of mean-stationary time series and a probabilistic framework which deals with outliers. A demonstration on the NASDAQ Composite index daily returns shows that the proposed approach produces surrogates that faithfully reproduce the structure of the original series while being manifestations of linear-random dynamics.

Keywords: Surrogate data analysis; Least median of squares; Heteroscedasticity; Chaos; Financial time series analysis (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:368:y:2006:i:2:p:522-530

DOI: 10.1016/j.physa.2005.12.037

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