Double asymptotics for explosive continuous time models
This paper establishes a double asymptotic theory for explosive continuous time Lévy-driven processes and the corresponding exact discrete time models. The double asymptotic theory assumes the sample size diverges because the sampling interval (h) shrinks to zero and the time span (N) diverges. Both the simultaneous and sequential double asymptotic distributions are derived. In contrast to the long-time-span asymptotics (N→∞ with fixed h) where no invariance principle applies, the double asymptotic distribution is derived without assuming Gaussian errors, so an invariance principle applies, as the asymptotic theory for the mildly explosive process developed by Phillips and Magdalinos (2007). Like the in-fill asymptotics (h→0 with fixed N) of Perron (1991), the double asymptotic distribution explicitly depends on the initial condition. The convergence rate of the double asymptotics partially bridges that of the long-time-span asymptotics and that of the in-fill asymptotics. Monte Carlo evidence shows that the double asymptotic distribution works well in practically realistic situations and better approximates the finite sample distribution than the asymptotic distribution that is independent of the initial condition. Empirical applications to real Nasdaq prices highlight the difference between the new theory and the theory without taking the initial condition into account.
Explosive continuous time models, Lévy process, Moderate deviations from unity, Double asymptotics, Invariance principle, Initial condition
Journal of Econometrics
WANG, Xiaohu and Jun YU.
Double asymptotics for explosive continuous time models. (2016). Journal of Econometrics. 193, (1), 35-53. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/5112
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