SEMIFARMA-HYGARCH Modeling of Dow Jones Return Persistence

Mohamed Chikhi (1, 2) , Anne Peguin-Feissolle (3) , Michel Terraza (2)

1 Université Kasdi Merbah Ouargla
2 LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée
3 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille

This paper analyzes the cyclical behavior of Dow Jones by testing the existence of long memory through a new class of semiparametric ARFIMA models with HYGARCH errors (SEMIFARMA-HYGARCH); this class includes nonparametric deterministic trend, stochastic trend, short-range and long-range dependence and long memory heteroscedastic errors. We study the daily returns of the Dow Jones from 1896 to 2006. We estimate several models and we find that the coefficients of the SEMIFARMA-HYGARCH model, including long memory coefficients for the equations of the mean and the conditional variance, are highly significant. The forecasting results show that the informational shocks have permanent effects on volatility and the SEMIFARMA-HYGARCH model has better performance over some other models for long and/or short horizons. The predictions from this model are also better than the predictions of the random walk model; accordingly, the weak efficiency assumption of financial markets seems violated for Dow Jones returns studied over a long period.

Mots clés: kernel methodology; long memory; SEMIFARMA model; HYGARCH model; nonparametric deterministic trend

Domaines: Economies et finances

Mohamed Chikhi, Anne Peguin-Feissolle, Michel Terraza. SEMIFARMA-HYGARCH Modeling of Dow Jones Return Persistence. 2012. ⟨halshs-00793203⟩