Department of Economics and Business Economics

Estimating the Persistence and the Autocorrelation Function of a Time Series that is Measured with Error

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Estimating the Persistence and the Autocorrelation Function of a Time Series that is Measured with Error. / Hansen, Peter Reinhard; Lunde, Asger.

In: Econometric Theory, Vol. 30, No. 1, 2014, p. 60-93.

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@article{609339d6847a4f76b92f16b01a56d341,
title = "Estimating the Persistence and the Autocorrelation Function of a Time Series that is Measured with Error",
abstract = "An economic time series can often be viewed as a noisy proxy for an underlyingeconomic variable. Measurement errors will influence the dynamic properties of the observed process and may conceal the persistence of the underlying time series. In this paper we develop instrumental variable (IV) methods for extracting information about the latent process. Our framework can be used to estimate the autocorrelation function of the latent volatility process and a key persistence parameter. Our analysis is motivated by the recent literature on realized volatility measures that are imperfect estimates of actual volatility. In an empirical analysis using realized measures for the Dow Jones industrial average stocks, we find the underlying volatility to be near unit root in all cases. Although standard unit root tests are asymptotically justified, we find them to be misleading in our application despite the large sample. Unit root tests that are based on the IV estimator have better finite sample properties in this context.",
author = "Hansen, {Peter Reinhard} and Asger Lunde",
note = "Campus adgang til til artiklen / Campus access to the article",
year = "2014",
doi = "10.1017/S0266466613000121",
language = "English",
volume = "30",
pages = "60--93",
journal = "Econometric Theory",
issn = "0266-4666",
publisher = "Cambridge University Press",
number = "1",

}

RIS

TY - JOUR

T1 - Estimating the Persistence and the Autocorrelation Function of a Time Series that is Measured with Error

AU - Hansen, Peter Reinhard

AU - Lunde, Asger

N1 - Campus adgang til til artiklen / Campus access to the article

PY - 2014

Y1 - 2014

N2 - An economic time series can often be viewed as a noisy proxy for an underlyingeconomic variable. Measurement errors will influence the dynamic properties of the observed process and may conceal the persistence of the underlying time series. In this paper we develop instrumental variable (IV) methods for extracting information about the latent process. Our framework can be used to estimate the autocorrelation function of the latent volatility process and a key persistence parameter. Our analysis is motivated by the recent literature on realized volatility measures that are imperfect estimates of actual volatility. In an empirical analysis using realized measures for the Dow Jones industrial average stocks, we find the underlying volatility to be near unit root in all cases. Although standard unit root tests are asymptotically justified, we find them to be misleading in our application despite the large sample. Unit root tests that are based on the IV estimator have better finite sample properties in this context.

AB - An economic time series can often be viewed as a noisy proxy for an underlyingeconomic variable. Measurement errors will influence the dynamic properties of the observed process and may conceal the persistence of the underlying time series. In this paper we develop instrumental variable (IV) methods for extracting information about the latent process. Our framework can be used to estimate the autocorrelation function of the latent volatility process and a key persistence parameter. Our analysis is motivated by the recent literature on realized volatility measures that are imperfect estimates of actual volatility. In an empirical analysis using realized measures for the Dow Jones industrial average stocks, we find the underlying volatility to be near unit root in all cases. Although standard unit root tests are asymptotically justified, we find them to be misleading in our application despite the large sample. Unit root tests that are based on the IV estimator have better finite sample properties in this context.

U2 - 10.1017/S0266466613000121

DO - 10.1017/S0266466613000121

M3 - Journal article

VL - 30

SP - 60

EP - 93

JO - Econometric Theory

JF - Econometric Theory

SN - 0266-4666

IS - 1

ER -