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Infinite-order, long-memory heterogeneous autoregressive models

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  • Hwang, Eunju
  • Shin, Dong Wan

Abstract

We develop an infinite-order extension of the HAR-RV model, denoted by HAR(∞). We show that the autocorrelation function of the model is algebraically decreasing and thus the model is a long-memory model if and only if the HAR coefficients decrease exponentially. For a finite sample, a prediction is made using coefficients estimated by ordinary least squares (OLS) fitting for a finite-order model, HAR(p), say. We show that the OLS estimator (OLSE) is consistent and asymptotically normal. The approximate one-step-ahead prediction mean-square error is derived. Analysis shows that the prediction error is mainly due to estimation of the HAR(p) coefficients rather than to errors made in approximating HAR(∞) by HAR(p). This result provides a theoretical justification for wide use of the HAR(3) model in predicting long-memory realized volatility. The theoretical result is confirmed by a finite-sample Monte Carlo experiment for a real data set.

Suggested Citation

  • Hwang, Eunju & Shin, Dong Wan, 2014. "Infinite-order, long-memory heterogeneous autoregressive models," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 339-358.
    • Handle: RePEc:eee:csdana:v:76:y:2014:i:c:p:339-358
    DOI: 10.1016/j.csda.2013.08.009
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    Cited by:

    1. Asai Manabu & Peiris Shelton & McAleer Michael & Allen David E., 2020. "Cointegrated Dynamics for a Generalized Long Memory Process: Application to Interest Rates," Journal of Time Series Econometrics, De Gruyter, vol. 12(1), pages 1-18, January.
    2. Audrino, Francesco & Camponovo, Lorenzo & Roth, Constantin, 2015. "Testing the lag structure of assets’ realized volatility dynamics," Economics Working Paper Series 1501, University of St. Gallen, School of Economics and Political Science.
    3. Lee, Oesook, 2014. "The functional central limit theorem and structural change test for the HAR(∞) model," Economics Letters, Elsevier, vol. 124(3), pages 370-373.
    4. Won-Tak Hong & Jiwon Lee & Eunju Hwang, 2020. "A Note on the Asymptotic Normality Theory of the Least Squares Estimates in Multivariate HAR-RV Models," Mathematics, MDPI, vol. 8(11), pages 1-18, November.
    5. Yang, Ke & Tian, Fengping & Chen, Langnan & Li, Steven, 2017. "Realized volatility forecast of agricultural futures using the HAR models with bagging and combination approaches," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 276-291.
    6. Song, Junmo & Baek, Changryong, 2019. "Detecting structural breaks in realized volatility," Computational Statistics & Data Analysis, Elsevier, vol. 134(C), pages 58-75.
    7. Seul-Ki Park & Ji-Eun Choi & Dong Wan Shin, 2017. "Value at risk forecasting for volatility index," Applied Economics Letters, Taylor & Francis Journals, vol. 24(21), pages 1613-1620, December.
    8. Hwang, Eunju & Shin, Dong Wan, 2015. "A CUSUMSQ test for structural breaks in error variance for a long memory heterogeneous autoregressive model," Statistics & Probability Letters, Elsevier, vol. 99(C), pages 167-176.
    9. Ding, Yi & Kambouroudis, Dimos & McMillan, David G., 2021. "Forecasting realised volatility: Does the LASSO approach outperform HAR?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    10. Asai, M. & Peiris, S. & McAleer, M.J. & Allen, D.E., 2018. "Cointegrated Dynamics for A Generalized Long Memory Process," Econometric Institute Research Papers EI 2018-32, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    11. Vortelinos, Dimitrios I., 2015. "Out-of-sample evaluation of macro announcements, linearity, long memory, heterogeneity and jumps in mini-futures markets," Review of Financial Economics, Elsevier, vol. 27(C), pages 58-67.

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