Saturday, October 7, 2017

Long Memory in Realized Volatility

A noteworthy aspect of long memory in realized asset return volatility is that in many leading cases it's basically undeniable on the basis of a variety of evidence -- the question isn't existence but rather strength.  Hence it's useful to have a broad and comparable set of state-of-the-art (local Whittle) estimates together in one place, as in the interesting paper below.  For the most part it gets d in [.4, .6], consistent with my personal experience of d usually around .45, in the covariance stationary (finite variance) region d<.5, but close to the boundary.

By:Wenger, Kai ; Leschinski, Christian ; Sibbertsen, Philipp
The focus of the volatility literature on forecasting and the predominance of the conceptually simpler HAR model over long memory stochastic volatility models has led to the fact that the actual degree of memory estimates has rarely been considered. Estimates in the literature range roughly between 0.4 and 0.6 - that is from the higher stationary to the lower non-stationary region. This difference, however, has important practical implications - such as the existence or non-existence of the fourth moment of the return distribution. Inference on the memory order is complicated by the presence of measurement error in realized volatility and the potential of spurious long memory. In this paper we provide a comprehensive analysis of the memory in variances of international stock indices and exchange rates. On the one hand, we find that the variance of exchange rates is subject to spurious long memory and the true memory parameter is in the higher stationary range. Stock index variances, on the other hand, are free of low frequency contaminations and the memory is in the lower non-stationary range. These results are obtained using state of the art local Whittle methods that allow consistent estimation in presence of perturbations or low frequency contaminations.
Keywords:Realized Volatility; Long Memory; Perturbation; Spurious Long Memory
JEL:C12 C22 C58 G15