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Non-stationarities in stock returns

Author

Listed:
  • Catalin Starica

    (Dept. Mathematical Statistics, Chalmers University of Technology)

  • Clive Granger

    (Dept. Economics, UCSD)

Abstract

The paper outlines a methodology for analyzing daily stock returns that relinquishes the assumption of global stationarity. Giving up this common working hypothesis reflects our belief that fundamental features of the financial markets are continuously and significantly changing. Our approach approximates locally the non-stationary data by stationary models. The methodology is applied to the S&P 500 series of returns covering a period of over seventy years of market activity. We find most of the dynamics of this time series to be concentrated in shifts of the unconditional variance. The forecasts based on our non-stationary unconditional modeling were found to be superior to those obtained in a stationary long memory framework or to those based on a stationary Garch(1,1) data generating process.

Suggested Citation

  • Catalin Starica & Clive Granger, 2004. "Non-stationarities in stock returns," Econometrics 0411016, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpem:0411016
    Note: Type of Document - pdf; pages: 67
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    References listed on IDEAS

    as
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    5. Catalin Starica & Stefano Herzel & Tomas Nord, 2005. "Why does the GARCH(1,1) model fail to provide sensible longer- horizon volatility forecasts?," Econometrics 0508003, University Library of Munich, Germany.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    stock returns; non-stationarities; locally stationary processes; volatility; sample autocorrelation; long range dependence; Garch(1; 1) data generating process.;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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