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Simulation Evidence on Long Memory and Regime Switching in the Second Moment for Modelling of Financial Returns

Isaksson, Hans LU (2015) NEKN01 20151
Department of Economics
Abstract
It is well-known that long memory and regime switching in the first moment of a stochastic process are easily confused. But the relation between long memory in the second moment and regime switching in the second moment is less well understood. We perform a simulation study in which we assess the possibility to distinguish the two properties in the case that data with long memory in the second moment is generated as a FIGARCH(0,d,0)-process, and when regime switching is modelled by HMM with switching variance. Those model specifications are common in the modelling of financial returns, and conform to several well-known stylised facts of financial data. The simulation study lends evidence to the risk of confusing long memory and regime... (More)
It is well-known that long memory and regime switching in the first moment of a stochastic process are easily confused. But the relation between long memory in the second moment and regime switching in the second moment is less well understood. We perform a simulation study in which we assess the possibility to distinguish the two properties in the case that data with long memory in the second moment is generated as a FIGARCH(0,d,0)-process, and when regime switching is modelled by HMM with switching variance. Those model specifications are common in the modelling of financial returns, and conform to several well-known stylised facts of financial data. The simulation study lends evidence to the risk of confusing long memory and regime switching in the case studied. (Less)
Please use this url to cite or link to this publication:
author
Isaksson, Hans LU
supervisor
organization
course
NEKN01 20151
year
type
H1 - Master's Degree (One Year)
subject
keywords
Long memory, Regime switching, HMM, FIGARCH, Simulation study, Returns
language
English
id
5277220
date added to LUP
2015-04-29 13:48:43
date last changed
2015-04-29 13:48:43
@misc{5277220,
  abstract     = {{It is well-known that long memory and regime switching in the first moment of a stochastic process are easily confused. But the relation between long memory in the second moment and regime switching in the second moment is less well understood. We perform a simulation study in which we assess the possibility to distinguish the two properties in the case that data with long memory in the second moment is generated as a FIGARCH(0,d,0)-process, and when regime switching is modelled by HMM with switching variance. Those model specifications are common in the modelling of financial returns, and conform to several well-known stylised facts of financial data. The simulation study lends evidence to the risk of confusing long memory and regime switching in the case studied.}},
  author       = {{Isaksson, Hans}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Simulation Evidence on Long Memory and Regime Switching in the Second Moment for Modelling of Financial Returns}},
  year         = {{2015}},
}