Title: Volatility of stock market and exchange rate returns in Peru: Long memory or short memory with level shifts?

Authors: Andrés Herrera Aramburú; Gabriel Rodríguez

Addresses: Department of Economics, Pontificia Universidad Católica del Perú, Av. Universitaria 1801, Lima 32, Lima, Perú ' Department of Economics, Pontificia Universidad Católica del Perú, Av. Universitaria 1801, Lima 32, Lima, Perú

Abstract: This paper represents the first attempts to distinguish between long- and short-memory (with level shifts) in volatility of Peruvian stock and Forex rate returns. We utilise the approach of Perron and Qu (2010). The daily data span the period 3 January, 1990 to 13 June, 2013 for the stock market returns, and from 3 January, 1997 to 24 June, 2013 for the Forex rate returns. The analysis of the ACF, the periodogram and the fractional parameter estimates for both volatilities suggests that the theoretical predictions of the simple mixture model of Perron and Qu (2010) are correct. The results are more conclusive for the stock market volatility. The application of one statistic suggests rejection of the long-memory hypothesis for both volatilities. Other two statistics provide weak evidence against the null hypothesis, above all for the Forex rate market. To reinforce the findings, some results associated with other investigations are presented.

Keywords: structural change; jumps; long memory processes; fractional integration; frequency domain estimates; RLS; random level shifts; stock markets; Forex rate volatility; Peru; stock market volatility; exchange rate returns; short memory processes.

DOI: 10.1504/IJMEF.2016.074579

International Journal of Monetary Economics and Finance, 2016 Vol.9 No.1, pp.45 - 66

Received: 20 Jan 2015
Accepted: 06 Jun 2015
Published online: 06 Feb 2016 *

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