《An Analytical Evaluation of the Log-periodogram Estimate in the Presence of Level Shifts》.pdf

An Analytical Evaluation of the Log-periodogram Estimate in the Presence of Level Shifts∗ Pierre Perron† Zhongjun Qu‡ Boston University Boston University October 29, 2007 Abstract Recently, there has been an upsurge of interest on the possibility of confusing long memory and structural changes in level. Many studies have shown that when a station- ary short memory process is contaminated by level shifts the estimate of the fractional differencing parameter is biased away from zero and the autocovariance function ex- hibits a slow rate of decay, akin to a long memory process. We analyze the properties of the log periodogram estimate of the memory parameter when the jump component is specified by a simple mixture model. Our theoretical results explain many findings reported and uncover new features. Simulations are presented to highlight the prop- erties of the distributions and to assess the adequacy of our approximations. We also show the usefulness of our results to distinguish between long memory and level shifts via an application to the volatility of daily returns for wheat commodity futures. JEL Classification Number: C22. Keywords: structural change, jumps, long memory processes, fractional integra- tion, Poisson process, frequency domain estimates. ∗This is a revised version of parts of a working paper entitled “An Analytical Evaluation of the Log- periodogram Estimate in the Presence of Level Shifts and its Implications for Stock Returns Volatility”. We ˇ are gratuful to Andrew Barbour, Vydas Cekanavicus, Jean-Marie Dufour, Lajos Horvá