Skip to content

Calibration of mean reversion models

2 messages · Chenchen Jin, Arun Kumar Saha

Original
Arun Kumar Saha
# 
Hi Chenchen, you said "most of financial time series are nonstationary (with
unit root), how can it be possible to fit a stationary model " -------- I
think it is mostly a matter of taste on what you really believe. Most of the
cases (perhaps all) unit root tests are less powerful near the upper
boundary of stability region. Therefore although you can not reject of the
existence of unit root based on a typical realization, actual DGP may be
stationary. Therefore relying heavily on statistical tests may be
disastrous. Therefore if you really believe there is some mean-reversion in
the actual DGP, you can just go ahead.

Thanks,

_____________________________________________________

Arun Kumar Saha, FRM
QUANTITATIVE RISK AND HEDGE CONSULTING SPECIALIST
Visit me at: http://in.linkedin.com/in/ArunFRM
_____________________________________________________