Bivariate FIGARCH and Fractional Cointegration

Queen Mary & Westfield College, Department of Economics Working Paper No. 408

21 Pages Posted: 1 Mar 2000

See all articles by Celso Brunetti

Celso Brunetti

Board of Governors of the Federal Reserve System

Christopher L. Gilbert

Vrije Universiteit Amsterdam, School of Business and Economics; Centre for Economic Policy Research (CEPR)

Date Written: December 1999

Abstract

We consider the modelling of volatility on closely related markets. Univariate fractional volatility (FIGARCH) models are now standard, as are multivariate GARCH models. In this paper we adopt a combination of the two methodologies. There is as yet little consensus on the methodology for testing for fractional cointegration. The contribution of this paper is to demonstrate the feasibility of estimating and testing cointegrated bivariate FIGARCH models. We apply these methods to volatility on the NYMEX and IPE crude oil markets. We find a common order of fractional integration for the two volatility processes and confirm that they are fractionally cointegrated. An estimated error correction FIGARCH model indicates that the preponderant adjustment is of the IPE towards NYMEX.

JEL Classification: C22, C32, G13

Suggested Citation

Brunetti, Celso and Gilbert, Christopher L., Bivariate FIGARCH and Fractional Cointegration (December 1999). Queen Mary & Westfield College, Department of Economics Working Paper No. 408, Available at SSRN: https://ssrn.com/abstract=205674 or http://dx.doi.org/10.2139/ssrn.205674

Celso Brunetti

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Christopher L. Gilbert (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 444 6102/6060 (Phone)
+31 20 444 6020 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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