Distinguishing Short and Long Memory Volatility Specifications

38 Pages Posted: 31 Jan 2006 Last revised: 12 May 2014

See all articles by Shiu-yan Eddie Pong

Shiu-yan Eddie Pong

Lancaster University - Department of Accounting and Finance

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance

Stephen J. Taylor

Lancaster University - Department of Accounting and Finance

Date Written: March 2008

Abstract

Asset price volatility appears to be more persistent than can be captured by individual, short memory, autoregressive or moving average components. Fractional integration offers a very parsimonious and tempting formulation of this long memory property of volatility but other explanations such as structural models (aggregates of several autoregressive components) are possible. Given the ability of the latter to mimic the former, we investigate the extent to which it is possible to distinguish short from long memory volatility specifications. For a likelihood ratio test in the spectral domain, we investigate size and power characteristics by Monte Carlo simulation. Finally applying the same test to Sterling/Dollar returns, we draw conclusions about the minimum number of structural factors that must be present to mimic the long memory volatility properties that are empirically observed.

Keywords: long memory, volatility, spectral test

JEL Classification: C15, G15

Suggested Citation

Pong, Shiu-yan Eddie and Shackleton, Mark B. and Taylor, Stephen J., Distinguishing Short and Long Memory Volatility Specifications (March 2008). Available at SSRN: https://ssrn.com/abstract=879742 or http://dx.doi.org/10.2139/ssrn.879742

Shiu-yan Eddie Pong

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+ 44 1524 847321 (Phone)

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
44 1524 594131 (Phone)
44 1524 847321 (Fax)

Stephen J. Taylor (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+ 44 15 24 59 36 24 (Phone)
+ 44 15 24 84 73 21 (Fax)

HOME PAGE: http://www.lancs.ac.uk/staff/afasjt

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