Persistence in Nonlinear Time Series: A Nonparametric Approach
Juan Carlos Escanciano
Indiana University Bloomington - Department of Economics
University of Navarra
February 6, 2009
CAEPR Working Paper No. 2009-003
The purpose of the present paper is to relate two important concepts of time series analysis, namely, nonlinearity and persistence. Traditional measures of persistence are based on correlations or periodograms, which may be inappropriate under nonlinearity and/or non-Gaussianity. This article proves that nonlinear persistence can be characterized by cumulative measures of dependence. The new cumulative measures are nonparametric, simple to estimate and do not require the use of any smoothing user-chosen parameters. In addition, we propose nonparametric estimates of our measures and establish their limiting properties. Finally, we employ our measures to analyze the nonlinear persistence properties of some international stock market indices, where we find an ubiquitous nonlinear persistence in conditional variance that is not accounted for by popular parametric models or by classical linear measures of persistence. This finding has important economic implications in, e.g., asset pricing and hedging. Conditional variance persistence in bull and bear markets is also analyzed and compared.
Number of Pages in PDF File: 48
Keywords: Conditional Mean, Nonlinear time series, Non- linear Persistence, Nonlinear correlograms, Persistence in variance, Bull and bear markets.
JEL Classification: C12, C14
Date posted: February 19, 2009 ; Last revised: February 22, 2009