Abstract
We develop a practical implementation of the test proposed in Berkes, Horv´ath, Kokoszka, and Shao (2006) designed to distinguish between a change-point model and a long memory model. Our implementation is calibrated to distinguish between a shift in volatility of returns and long memory in squared returns. It uses a kernel estimator of the long-run variance of squared returns with the maximal lag selected by a data driven procedure which depends on the sample size, the location of the estimated change point and the direction of the apparent volatility shift (increase versus decrease). In a simulations study, we also consider other long-run variance estimators, including the VARHAC estimator, but we find that they lead to tests with inferior performance. Applied to returns on indexes and individual stocks, our test indicates that even for the same asset, a change-point model may be preferable for a certain period of time, whereas there is evidence of long memory in another period of time. Generally there is stronger evidence for long memory in the eight years ending June 2006 than in the eight years starting January 1992. This pattern is most pronounced for US stock indexes and shares in the US financial sector.
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