Testing for Spurious Long Memory: A Monte Carlo Comparison with an Application to Credit Default Swaps

36 Pages Posted: 17 Mar 2010

See all articles by Arturo Leccadito

Arturo Leccadito

Università degli Studi della Calabria

Omar Rachedi

ESADE Business School

Giovanni Urga

Centre for Econometric Analysis, Faculty of Finance, Bayes Business School (formerly Cass), London, UK

Date Written: February 20, 2010

Abstract

A common feature of financial time series is their strong persistence. Yet, long memory may just be the spurious effect of either structural breaks or slow switching regimes. So far, five testing procedures have been proposed to distinguish between true and spurious long memory. The tests are constructed under the null of true long memory versus the alternative of spurious long memory due to level shifts or breaks. We compare the tests in an extensive Monte Carlo experiment and analyze their overall performances. Finally, we study CDS spreads and find evidence of genuine long memory.

Keywords: Fractional integration, Structural Break, Regime Switching

JEL Classification: C14, C22, G13

Suggested Citation

Leccadito, Arturo and Rachedi, Omar and Urga, Giovanni, Testing for Spurious Long Memory: A Monte Carlo Comparison with an Application to Credit Default Swaps (February 20, 2010). Available at SSRN: https://ssrn.com/abstract=1571626 or http://dx.doi.org/10.2139/ssrn.1571626

Arturo Leccadito

Università degli Studi della Calabria ( email )

Ponte Bucci, Cubo 3C
Rende, Cosenza 87036
Italy

Omar Rachedi

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

Giovanni Urga (Contact Author)

Centre for Econometric Analysis, Faculty of Finance, Bayes Business School (formerly Cass), London, UK ( email )

108 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 8698 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.bayes.city.ac.uk/faculties-and-research/experts/giovanni-urga

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