TY - JOUR

T1 - Fractional integration versus level shifts

T2 - the case of realized asset correlations

AU - Bertram, Philip

AU - Kruse, Robinson

AU - Sibbertsen, Philipp

N1 - Funding Information: Acknowledgments The authors thank two anonymous referees for carefully reading the paper. Robinson Kruse gratefully acknowledges financial support from CREATES funded by the Danish National Research Foundation. The financial support by the Deutsche Forschungsgemeinschaft (DFG) is gratefully acknowledged.

PY - 2013/11

Y1 - 2013/11

N2 - Long memory has been widely documented for realized financial market volatility. As a novelty, we consider daily realized asset correlations and we investigate whether the observed persistence is (i) due to true long memory (i.e. fractional integration) or (ii) artificially generated by some structural break processes. These two phenomena are difficult to be distinguished in practice. Our empirical results strongly indicate that the hyperbolic decay of the autocorrelation functions of pair-wise realized correlation series is indeed not driven by a truly fractionally integrated process. This finding is robust against user specific parameter choices in the applied test statistic and holds for all 15 considered time series. As a next step, we apply simple models with deterministic level shifts. When selecting the number of breaks, estimating the breakpoints and the corresponding structural break models we find a substantial degree of co-movement between the realized correlation series hinting at co-breaking. The estimated structural break models are interpreted in the light of the historic economic and financial development.

AB - Long memory has been widely documented for realized financial market volatility. As a novelty, we consider daily realized asset correlations and we investigate whether the observed persistence is (i) due to true long memory (i.e. fractional integration) or (ii) artificially generated by some structural break processes. These two phenomena are difficult to be distinguished in practice. Our empirical results strongly indicate that the hyperbolic decay of the autocorrelation functions of pair-wise realized correlation series is indeed not driven by a truly fractionally integrated process. This finding is robust against user specific parameter choices in the applied test statistic and holds for all 15 considered time series. As a next step, we apply simple models with deterministic level shifts. When selecting the number of breaks, estimating the breakpoints and the corresponding structural break models we find a substantial degree of co-movement between the realized correlation series hinting at co-breaking. The estimated structural break models are interpreted in the light of the historic economic and financial development.

KW - Fractional integration

KW - Long memory

KW - Realized correlation

KW - Structural breaks

UR - http://www.scopus.com/inward/record.url?scp=84885918372&partnerID=8YFLogxK

U2 - 10.1007/s00362-013-0513-2

DO - 10.1007/s00362-013-0513-2

M3 - Article

AN - SCOPUS:84885918372

VL - 54

SP - 977

EP - 991

JO - Statistical papers

JF - Statistical papers

SN - 0932-5026

IS - 4

ER -