Bootstrap Score Tests for Fractional Integration in Heteroskedastic ARFIMA Models, with an Application to Price Dynamics in Commodity Spot and Futures Markets

Giuseppe Cavaliere, Morten Nielsen and Robert Taylor

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Empirical evidence from time series methods which assume the usual I(0)/I(1) paradigm suggests that the efficient market hypothesis, stating that spot and futures prices of a commodity should cointegrate with a unit slope on futures prices, does not hold. However, these statistical methods are known to be unreliable if the data are fractionally integrated. Moreover, spot and futures price data tend to display clear patterns of time-varying volatility which also has the potential to invalidate the use of these methods. Using new tests constructed within a more general heteroskedastic fractionally integrated model we are able to find a body of evidence in support of the efficient market hypothesis for a number of commodities. Our new tests are wild bootstrap implementations of score-based tests for the order of integration of a fractionally integrated time series. These tests are designed to be robust to both conditional and unconditional heteroskedasticity of a quite general and unknown form in the shocks. We show that the asymptotic tests do not admit pivotal asymptotic null distributions in the presence of heteroskedasticity, but that the corresponding tests based on the wild bootstrap principle do. A Monte Carlo simulation study demonstrates that very significant improvements infinite sample behaviour can be obtained by the bootstrap vis-à-vis the corresponding asymptotic tests in both heteroskedastic and homoskedastic environments.

Keywords: Bootstrap; efficient market hypothesis; fractional integration; score tests; spot and futures commodity prices; time-varying volatility (search for similar items in EconPapers)
JEL-codes: C12 C22 C58 G13 G14 (search for similar items in EconPapers)
Pages: 34
Date: 2014-08-13
New Economics Papers: this item is included in nep-ets and nep-ore
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https://repec.econ.au.dk/repec/creates/rp/14/rp14_22.pdf (application/pdf)

Related works:
Journal Article: Bootstrap score tests for fractional integration in heteroskedastic ARFIMA models, with an application to price dynamics in commodity spot and futures markets (2015)
Working Paper: Bootstrap Score Tests For Fractional Integration In Heteroskedastic Arfima Models, With An Application To Price Dynamics In Commodity Spot And Futures Markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2014-22

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