A wavelet-based approach to the analysis and modelling of financial time series exhibiting strong long-range dependence: the case of Southeast Europe

Boryana Bogdanova and Ivan Ivanov

Journal of Applied Statistics, 2016, vol. 43, issue 4, 655-673

Abstract: This paper demonstrates the utilization of wavelet-based tools for the analysis and prediction of financial time series exhibiting strong long-range dependence (LRD). Commonly emerging markets' stock returns are characterized by LRD. Therefore, we track the LRD evolvement for the return series of six Southeast European stock indices through the application of a wavelet-based semi-parametric method. We further engage the á trous wavelet transform in order to extract deeper knowledge on the returns term structure and utilize it for prediction purposes. In particular, a multiscale autoregressive (MAR) model is fitted and its out-of-sample forecast performance is benchmarked to that of ARMA. Additionally, a data-driven MAR feature selection procedure is outlined. We find that the wavelet-based method captures adequately LRD dynamics both in calm as well as in turmoil periods detecting the presence of transitional changes. At the same time, the MAR model handles with the complicated autocorrelation structure implied by the LRD in a parsimonious way achieving better performance.

Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1080/02664763.2015.1077370

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