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New Approaches to Robust Inference on Market (Non-)Efficiency, Volatility Clustering and Nonlinear Dependence

Rustam Ibragimov, Rasmus Pedersen and Anton Skrobotov ()

Papers from arXiv.org

Abstract: Many key variables in finance, economics and risk management, including financial returns and foreign exchange rates, exhibit nonlinear dependence, heterogeneity and heavy-tailedness of some usually largely unknown type. The presence of non-linear dependence (usually modelled using GARCH-type dynamics) and heavy-tailedness may make problematic the analysis of (non-)efficiency, volatility clustering and predictive regressions in economic and financial markets using traditional approaches that appeal to asymptotic normality of sample autocorrelation functions (ACFs) of returns and their squares. The paper presents several new approaches to deal with the above problems. We provide the results that motivate the use of measures of market (non-)efficiency, volatility clustering and nonlinear dependence based on (small) powers of absolute returns and their signed versions. The paper provides asymptotic theory for sample analogues of the above measures in the case of general time series, including GARCH-type processes. It further develops new approaches to robust inference on them in the case of general GARCH-type processes exhibiting heavy-tailedness properties. The approaches are based on robust inference methods exploiting conservativeness properties of t-statistics Ibragimov and Muller (2010,2016) and several new results on their applicability in the settings considered. In the approaches, estimates of parameters of interest are computed for groups of data and the inference is based on t-statistics in resulting group estimates. This results in valid robust inference under a wide range of heterogeneity and dependence assumptions satisfied in financial and economic markets. Numerical results and empirical applications confirm advantages of the new approaches over existing ones and their wide applicability.

Date: 2020-06
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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