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SEMIFARMA-HYGARCH Modeling of Dow Jones Return Persistence

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Abstract

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.

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Authors and Affiliations

  1. Université de Ouargla, Ouargla, Algeria

    Mohamed Chikhi

  2. Faculté des Sciences Economiques, LAMETA/CNRS, Université Montpellier I, Espace Richter, Avenue de la Mer, C.S. 79606, 34960, Montpellier Cedex 2, France

    Mohamed Chikhi & Michel Terraza

  3. GREQAM/CNRS, Centre de la Charité, Université d’Aix-Marseille 2, 2 rue de la Charité, 13236, Marseille Cedex 02, France

    Anne Péguin-Feissolle

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  1. Mohamed Chikhi
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  2. Anne Péguin-Feissolle
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  3. Michel Terraza
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Correspondence to Anne Péguin-Feissolle.

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Chikhi, M., Péguin-Feissolle, A. & Terraza, M. SEMIFARMA-HYGARCH Modeling of Dow Jones Return Persistence. Comput Econ 41, 249–265 (2013). https://doi.org/10.1007/s10614-012-9328-9

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  • DOI: https://doi.org/10.1007/s10614-012-9328-9

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