True Versus Spurious Long Memory: Some Theoretical Results and a Monte Carlo Comparison

Arturo Leccadito, Omar Rachedi and Giovanni Urga

Econometric Reviews, 2015, vol. 34, issue 4, 452-479

Abstract: A common feature of financial time series is their strong persistence. Yet, long memory may just be the spurious effect of either structural breaks or slow switching regimes. We explore the effects of spurious long memory on the elasticity of the stock market price with respect to volatility and show how cross-sectional aggregation may generate spurious persistence in the data. We undertake an extensive Monte Carlo study to compare the performance of five tests, constructed under the null of true long memory versus the alternative of spurious long memory due to level shifts or breaks.

Date: 2015
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DOI: 10.1080/07474938.2013.808462

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