Properties of the Sample Autocorrelations of Nonlinear Transformations in Long-Memory Stochastic Volatility Models

Ana Pérez and Esther Ruiz ()

Journal of Financial Econometrics, 2003, vol. 1, issue 3, 420-444

Abstract: The autocorrelations of log-squared, squared, and absolute financial returns are often used to infer the dynamic properties of the underlying volatility. This article shows that, in the context of long-memory stochastic volatility models, these autocorrelations are smaller than the autocorrelations of the log volatility and so is the rate of decay for squared and absolute returns. Furthermore, the corresponding sample autocorrelations could have severe negative biases, making the identification of conditional heteroscedasticity and long memory a difficult task. Finally, we show that the power of some popular tests for homoscedasticity is larger when they are applied to absolute returns. , .

Date: 2003
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