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Nonlinear Models with Strongly Dependent Processes and Applications to Forward Premia and Real Exchange Rates

Author

Listed:
  • Richard T. Baillie

    (Michigan State University and Queen Mary, University of London)

  • George Kapetanios

    (Queen Mary, University of London)

Abstract

This paper considers estimation and inference in some general non linear time series models which are embedded in a strongly dependent, long memory process. Some new results are provided on the properties of a time domain MLE for these models. The paper also includes a detailed simulation study which compares the time domain MLE with a two step estimator, where the Local Whittle estimator has been initially employed to filter out the long memory component. The time domain MLE is found to be generally superior to two step estimation. Further, the simulation study documents the difficulty of precisely estimating the parameter associated with the speed of transition. Finally, the fractionally integrated, non-linear auto-regressive-ESTAR model is found to be extremely useful in representing some financial time series such as the forward premium and real exchange rates.

Suggested Citation

  • Richard T. Baillie & George Kapetanios, 2006. "Nonlinear Models with Strongly Dependent Processes and Applications to Forward Premia and Real Exchange Rates," Working Papers 570, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:570
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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2006/items/wp570.pdf
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    References listed on IDEAS

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    1. Thabo M. Mokoena & Rangan Gupta & Reneé Van Eyden, 2009. "Testing For Fractional Integration In Southern African Development Community Real Exchange Rates," South African Journal of Economics, Economic Society of South Africa, vol. 77(4), pages 531-537, December.

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    More about this item

    Keywords

    Non-linearity; ESTAR models; Strong dependence; Forward premium; Real exchange rates;
    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
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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