Modelling Volatility and Level Shift in Fractionally Integrated Processes

Abstract

In this paper, we introduce the class of autoregressive fractionally integrated moving average-generalized autoregressive conditional heteroskedasticity (ARFIMA-GARCH) models with level shift type intervention that are capable of capturing three key features of time series: long range dependence, volatility and level shift. The main concern is on detection of mean and volatility level shift in a fractionally integrated time series with volatility. We will denote such a time series as level shift autoregressive fractionally integrated moving average (LS-ARFIMA) and level shift generalized autoregressive conditional heteroskedasticity (LS-GARCH). Test statistics that are useful to examine if mean and volatility level shifts are present in an autoregressive fractionally integrated moving average-generalized autoregressive conditional heteroskedasticity (ARFIMA-GARCH) model are derived. Quasi maximum likelihood estimation of the model is also considered.