TY - JOUR
T1 - Medium Band Least Squares Estimation of Fractional Cointegration in the Presence of Low-frequency Contamination
AU - Christensen, Bent Jesper
AU - Varneskov, Rasmus T.
PY - 2017/4
Y1 - 2017/4
N2 - 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.
AB - 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.
KW - Deterministic trends
KW - Factor models
KW - Fractional cointegration
KW - Long memory
KW - Realized variance
KW - Semiparametric estimation
KW - Structural change
KW - Deterministic trends
KW - Factor models
KW - Fractional cointegration
KW - Long memory
KW - Realized variance
KW - Semiparametric estimation
KW - Structural change
U2 - 10.1016/j.jeconom.2016.07.009
DO - 10.1016/j.jeconom.2016.07.009
M3 - Journal article
SN - 0304-4076
VL - 197
SP - 218
EP - 244
JO - Journal of Econometrics
JF - Journal of Econometrics
IS - 2
ER -