Estimating autocorrelations in the presence of deterministic trends

Wang, Shin-Huei;Hafner, Christian
(2008) , 20 pages

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  • Wang, Shin-HueiUniversité Catholique de Louvain
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  • Hafner, ChristianUniversité Catholique de Louvain
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Abstract
This paper considers the impact of ordinary least squares (OLS) detrending and the first difference (FD) detrending on autocorrelation estimation in the presence of long memory and deterministic trends. We show that the FD detrending results in inconsistent autocorrelation estimates when the error term is stationary. Thus, the FD detrending should not be employed for autocorrelation estimation of the detrended series when constructing e.g. portmanteau-type tests. In an empirical application of volume in Dow Jones stocks, we show that for some stocks, OLS and FD detrending result in substantial differences in ACF estimates.
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Wang, S.-H., & Hafner, C. (2008). Estimating autocorrelations in the presence of deterministic trends (CORE Discussion Papers 2008/73). https://hdl.handle.net/2078.5/250604