Time series models with asymmetric Laplace innovations

A. Alexandre Trindade, Yun Zhu, Beth Andrews

Research output: Contribution to journalArticle

10 Scopus citations

Abstract

We propose autoregressive moving average (ARMA) and generalized autoregressive conditional heteroscedastic (GARCH) models driven by asymmetric Laplace (AL) noise. The AL distribution plays, in the geometric-stable class, the analogous role played by the normal in the alpha-stable class, and has shown promise in the modelling of certain types of financial and engineering data. In the case of anARMA model we derive the marginal distribution of the process, as well as its bivariate distribution when separated by a finite number of lags. The calculation of exact confidence bands for minimum mean-squared error linear predictors is shown to be straightforward. Conditional maximum likelihood-based inference is advocated, and corresponding asymptotic results are discussed. The models are particularly suited for processes that are skewed, peaked, and leptokurtic, but which appear to have some higher order moments. A case study of a fund of real estate returns reveals that AL noise models tend to deliver a superior fit with substantially less parameters than normal noise counterparts, and provide both a competitive fit and a greater degree of numerical stability with respect to other skewed distributions.

Original languageEnglish (US)
Pages (from-to)1317-1333
Number of pages17
JournalJournal of Statistical Computation and Simulation
Volume80
Issue number12
DOIs
StatePublished - Dec 1 2010

Keywords

  • ARMA
  • Conditional maximum likelihood
  • Financial returns
  • GARCH
  • Joint distribution
  • Prediction

ASJC Scopus subject areas

  • Statistics and Probability
  • Modeling and Simulation
  • Statistics, Probability and Uncertainty
  • Applied Mathematics

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