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| Author: | Granger, C.W.J. Hyung, N. |
| Title: | Occasional structural breaks and long memory with an application to the S&P 500 absolute stock returns |
| Journal: | Journal of Empirical Finance
2004 : JUN, VOL. 11:3, p. 399-421 |
| Index terms: | Stock markets Models |
| Language: | eng |
| Abstract: | This paper shows that occasional breaks generate slowly decaying autocorrelations and other properties of I(d) processes, where d can be a fraction. This paper compares two time series models, an occasional-break (hereafter as: o-b.) model and an I(d) model to analyze S&P 500 absolute stock returns. An o-b. model performs marginally better than an I(d) model in terms of in-sample fitting. In general, it is found that an o-b. model provides less competitive forecasts, but not significantly. However, the empirical results suggest a possibility such that, at least, part of the long memory may be caused by the presence of neglected breaks in the series. It is shown that the forecasts by an o-b. model incorporate incremental information regrading future volatility beyond that found in I(d) model. |
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