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An easy test for two stationary long processes being uncorrelated via AR approximations

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  • WANG , Shin-Huei

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • HSIAO, Cheng

Abstract

This paper proposes an easy test for two stationary autoregressive fractionally integrated moving average (ARFIMA) processes being uncorrelated via AR approximations. We prove that an ARFIMA process can be approximated well by an autoregressive (AR) model and establish the theoretical foundation of Haugh's (1976) statistics to test two ARFIMA processes being uncorrelated. Using AIC or Mallow's Cp criterion as a guide, we demonstrate through Monte Carlo studies that a lower order AR(k) model is sufficient to prewhiten an ARFIMA process and the Haugh test statistics perform very well in finite sample. We illustrate the methodology by investigating the independence between the volatility of two daily nominal dollar exchange rates-Euro and Japanese Yen and find that there exists "strongly simultaneous correlation" between the volatilities of Euro and Yen within 25 days.

Suggested Citation

  • WANG , Shin-Huei & HSIAO, Cheng, 2008. "An easy test for two stationary long processes being uncorrelated via AR approximations," LIDAM Discussion Papers CORE 2008047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2008047
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2008.html
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    Cited by:

    1. 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).

    More about this item

    Keywords

    forecasting; long memory process; structural break.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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