Long memory or shifting means? A new approach and application to realised volatility

Eduardo Mendes, Les Oxley, William Rea and Marco Reale

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: It is now recognised that long memory and structural change can be confused because the statistical properties of times series of lengths typical of financial and econometric series are similar for both models. We propose a new set of methods aimed at distinguishing between long memory and structural change. The approach, which utilises the computational efficient methods based upon Atheoretical Regression Trees (ART), establishes through simulation the bivariate distribution of the fractional integration parameter, d, with regime length for simulated fractionally integrated series. This bivariate distribution is then compared with the data for the time series. We also combine ART with the established goodness of fit test for long memory series due to Beran. We apply these methods to the realized volatility series of 16 stocks in the Dow Jones Industrial Average. We show that in these series the value of the fractional integration parameter is not constant with time. The mathematical consequence of this is that the definition of H self-similarity is violated. We present evidence that these series have structural breaks.

Keywords: Long-range dependence; Strong dependence; Global dependence; Hurst phenomena (search for similar items in EconPapers)
JEL-codes: C22 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2008-01-29
New Economics Papers: this item is included in nep-ecm and nep-ets
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Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:08/04

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