Modelling Long-Run Trends and Cycles in Financial Time Series Data

41 Pages Posted: 13 Jun 2008

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Juncal Cunado

University of Navarra - Faculty of Economics

Luis A. Gil-Alana

University of Navarra - Department of Economics

Date Written: June 2008

Abstract

This paper proposes a very general time series framework to capture the long-run behaviour of financial series. The suggested model includes linear and non-linear time trends, and stationary and nonstationary processes based on integer and/or fractional degrees of differentiation. Moreover, the spectrum is allowed to contain more than a single pole or singularity, occurring at zero and non-zero (cyclical) frequencies. This model is used to analyse four annual time series with a long span, namely dividends, earnings, interest rates and long-term government bond yields. The results indicate that the four series exhibit fractional integration with one or two poles in the spectrum. A forecasting comparison shows that a model with a non-linear trend along with fractional integration outperforms alternative models over long horizons.

Keywords: fractional integration, financial time series data, trends, cycles

JEL Classification: C22, G1

Suggested Citation

Caporale, Guglielmo Maria and Cunado, Juncal and Gil-Alana, Luis A., Modelling Long-Run Trends and Cycles in Financial Time Series Data (June 2008). CESifo Working Paper Series No. 2330, Available at SSRN: https://ssrn.com/abstract=1145190

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Juncal Cunado

University of Navarra - Faculty of Economics ( email )

Campus Universitario
Pamplona, Navarra 31009
Spain

Luis A. Gil-Alana

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

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