Level Shifts and the Illusion of Long Memory in Economic Time Series

Aaron Smith

No 11974, Working Papers from University of California, Davis, Department of Agricultural and Resource Economics

Abstract: When applied to time series processes containing occasional level shifts, the logperiodogram (GPH) estimator often erroneously finds long memory. For a stationary short-memory process with a slowly varying level, I show that the GPH estimator is substantially biased, and I derive an approximation to this bias. The asymptotic bias lies on the (0,1) interval, and its exact value depends on the ratio of the expected number of level shifts to a user-defined bandwidth parameter. Using this result, I formulate the Modified GPH estimator, which has a markedly lower bias. I illustrate this new estimator via applications to soybean prices and stock market volatility.

Keywords: Research; Methods/Statistical; Methods (search for similar items in EconPapers)
Pages: 47
Date: 2004
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Level Shifts and the Illusion of Long Memory in Economic Time Series (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ucdavw:11974

DOI: 10.22004/ag.econ.11974

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