Subordinated exchange rate models: Evidence for heavy tailed distributions and long-range dependence

Subordinated exchange rate models: Evidence for heavy tailed distributions and long-range dependence

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Article ID: iaor2004544
Country: Netherlands
Volume: 34
Issue: 9/11
Start Page Number: 955
End Page Number: 1001
Publication Date: Nov 2001
Journal: Mathematical and Computer Modelling
Authors: , ,
Keywords: statistics: empirical
Abstract:

We investigate the main properties of high-frequency exchange rate data in the setting of stochastic subordination and stable modeling, focusing on heavy-tailedness and long memory, together with their dependence on the sampling period. We show that the intrinsic time process exhibits strong long-range dependence and has increments well described by a Weibull law, while the return series in intrinsic time has weak long memory and is well approximated by a stable Lévy motion. We also show that the stable domain of attraction offers a good fit to the returns in physical time, which leads us to consider as a realistic model for exchange rate data a process Z(t) subordinated to an α-stable Lévy motion S(t) (possibly fractional stable) by a long-memory intrinsic time process T(t) with Weibull-distributed increments.

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