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

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