Generating schemes for long memory processes: regimes, aggregation and linearity
University of Exeter; Universität Dortmund
Journal of Econometrics
This paper analyses a class of nonlinear time series models exhibiting long memory. These processes exhibit short memory fluctuations around a local mean (regime) which switches randomly such that the durations of the regimes follow a power law. We show that if a large number of independent copies of such a process are aggregated, the resulting processes are Gaussian, have a linear representation, and converge after normalisation to fractional Brownian motion. Alternatively, an aggregation scheme with Gaussian common components can yield the same result. However, a non-aggregated regime process is shown to converge to a Levy motion with infinite variance, suitably normalised, emphasising the fact that time aggregation alone fails to yield a FCLT. Two cases arise, a stationary case in which the partial sums of the process converge, and a nonstationary case in which the process itself converges, the Hurst coefficient falling in the ranges () and (), respectively. We comment on the relevance of our results to the interpretation of the long memory phenomenon, and also report some simulations aimed to throw light on the problem of discriminating between the models in practice.
Journal of Econometrics (2005) 128 (2) 253-282