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

No 1309, Working Paper from Economics Department, Queen's 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 co-integrate 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 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 neither the asymptotic tests nor the analogues of these which obtain from using a standard i.i.d. bootstrap 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 in finite sample behaviour can be obtained by the bootstrap vis-Ã -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: 43 pages
Date: 2013-12
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1309.pdf First version 2013 (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 (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1309

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