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Fractional integration versus level shifts: the case of realized asset correlations

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  • Philip Bertram
  • Robinson Kruse
  • Philipp Sibbertsen

Abstract

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. Copyright Springer-Verlag Berlin Heidelberg 2013

Suggested Citation

  • Philip Bertram & Robinson Kruse & Philipp Sibbertsen, 2013. "Fractional integration versus level shifts: the case of realized asset correlations," Statistical Papers, Springer, vol. 54(4), pages 977-991, November.
    • Handle: RePEc:spr:stpapr:v:54:y:2013:i:4:p:977-991
    DOI: 10.1007/s00362-013-0513-2
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    Cited by:

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    2. Becker, Janis & Leschinski, Christian & Sibbertsen, Philipp, 2019. "Robust Multivariate Local Whittle Estimation and Spurious Fractional Cointegration," Hannover Economic Papers (HEP) dp-660, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    3. Lihong Wang, 2020. "Nearest neighbors estimation for long memory functional data," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 29(4), pages 709-725, December.
    4. Dennis Alvaro & Ángel Guillén & Gabriel Rodríguez, 2017. "Modelling the volatility of commodities prices using a stochastic volatility model with random level shifts," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(1), pages 71-103, February.
    5. 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.
    6. Jan Beran & Yuanhua Feng & Sucharita Ghosh, 2015. "Modelling long-range dependence and trends in duration series: an approach based on EFARIMA and ESEMIFAR models," Statistical Papers, Springer, vol. 56(2), pages 431-451, May.
    7. Vasyl Golosnoy, 2018. "Sequential monitoring of portfolio betas," Statistical Papers, Springer, vol. 59(2), pages 663-684, June.

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    More about this item

    Keywords

    Long memory; Fractional integration; Structural breaks; Realized correlation; C12; C22;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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