Department of Economics and Business Economics

Rasmus T. Varneskov

Medium Band Least Squares Estimation of Fractional Cointegration in the Presence of Low-Frequency Contamination

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This paper introduces a new estimator of the fractional cointegrating vector between stationary long memory processes that is robust to low-frequency contamination such as random level shifts, outliers, Markov switching means, and certain deterministic trends. In particular, the proposed medium band least squares (MBLS) estimator uses sample-size-dependent trimming of frequencies in the vicinity of the origin to account for such contamination. Consistency and asymptotic normality of the MBLS estimator are established, a feasible inference procedure is proposed, and rigorous tools for assessing the cointegration strength and testing MBLS against the existing narrow band least squares estimator are developed. Finally, the asymptotic framework for the MBLS estimator is used to provide new perspectives on volatility factors in an empirical application to long-span realized variance series for S&P 500 equities. (C) 2016 Elsevier B.V. All rights reserved.

Original languageEnglish
JournalJournal of Econometrics
Volume197
Issue2
Pages (from-to)218-244
Number of pages27
ISSN0304-4076
DOIs
Publication statusPublished - 1 Apr 2017

    Research areas

  • DETERMINISTIC TRENDS, Deterministic trends, FORECASTING REALIZED VOLATILITY, Factor models, Fractional cointegration, GAUSSIAN SEMIPARAMETRIC ESTIMATION, LEVEL SHIFTS, LOCAL WHITTLE ESTIMATION, LONG-RANGE DEPENDENCE, Long memory, RETURN VOLATILITY, Realized variance, STOCHASTIC VOLATILITY, STRUCTURAL BREAKS, Semiparametric estimation, Structural change, TIME-SERIES

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