Unit Root Test with High-Frequency Data

54 Pages Posted: 4 Sep 2019

See all articles by Sébastien Laurent

Sébastien Laurent

AMSE

Shuping Shi

Department of Economics, Macquarie University

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2019

Abstract

Deviations of asset prices from the random walk dynamic imply the predictability of asset returns and thus have important implications for portfolio construction and risk management. This paper proposes a real-time monitoring device for such deviations using intraday high-frequency data. The proposed procedure is based on unit root tests with in-fill asymptotics but extended to take the empirical features of high-frequency financial data (particularly jumps) into consideration. We derive the limiting distribution of the test statistic under both the null hypothesis of a random walk with jumps and the alternative of mean reversion/explosiveness with jumps. The limiting results show that ignoring the presence of jumps could potentially lead to severe size distortions of both the left-sided (against mean reversion) and right-sided (against explosive) unit root tests. The simulation results reveal the satisfactory performance of the test even with data from a relatively short time span (i.e., one quarter). As an illustration, we apply the procedure to the Nasdaq composite index at the 10-minute frequency from January 2, 1996 to December 8, 2017. We find strong evidence of explosiveness dynamics in asset prices during the dot-com bubble and the subprime mortgage crisis periods and mean reversion in late 2015 and early 2016.

Keywords: unit root test, random walk, in-fill asymptotic, jumps, GARCH, periodicity, microstructure noise

JEL Classification: C12, C22

Suggested Citation

Laurent, Sébastien and Shi, Shuping, Unit Root Test with High-Frequency Data (July 15, 2019). Macquarie Business School Research Paper . Available at SSRN: https://ssrn.com/abstract=3447035 or http://dx.doi.org/10.2139/ssrn.3447035

Sébastien Laurent

AMSE ( email )

2 rue de la Charité
Marseille, 13236
France

Shuping Shi (Contact Author)

Department of Economics, Macquarie University ( email )

New South Wales 2109
Australia

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