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Long memory and outliers in stock market returns

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  • Jussi Tolvi

Abstract

Long memory in the form of fractional integration is analysed in stock market returns. Special emphasis is placed on taking into account the potential bias caused by neglected outliers in the data. It is first shown by a simulation experiment that outliers will bias the estimated fractional integration parameter towards zero. In a monthly data set, consisting of stock market indices of 16 OECD countries, statistically significant long memory is found for three countries. In one of these long memory is only found when outliers are first taken into account.

Suggested Citation

  • Jussi Tolvi, 2003. "Long memory and outliers in stock market returns," Applied Financial Economics, Taylor & Francis Journals, vol. 13(7), pages 495-502.
    • Handle: RePEc:taf:apfiec:v:13:y:2003:i:7:p:495-502
    DOI: 10.1080/09603100210161983
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    1. Ooms, M. & Doornik, J.A., 1999. "Inference and Forecasting for Fractional Autoregressive Integrated Moving Average Models, with an application to US and UK inflation," Econometric Institute Research Papers EI 9947/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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    1. Doornik, Jurgen A. & Ooms, Marius, 2003. "Computational aspects of maximum likelihood estimation of autoregressive fractionally integrated moving average models," Computational Statistics & Data Analysis, Elsevier, vol. 42(3), pages 333-348, March.

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