International Financial Markets by Chevallier Julien; Guerreiro David; Saglio Sophie

Author:Chevallier, Julien; Guerreiro, David; Saglio, Sophie
Language: eng
Format: epub
Publisher: Taylor & Francis Group
Published: 2019-07-15T00:00:00+00:00

where Ds,t are indicator variables that take the value 1 for t = s + S(q − 1) with q = 1, …, ⌊T/S⌋, where ⌊⋅⌋ denotes the greatest integer smaller than the argument and Zt are the regression residuals. The dummies account for seasonalities like calendar effects, e.g., day of the week, or intra-daily periodicity, e.g., hour of the day, and in a purely deterministic framework the regression residuals Zt are assumed to be free from seasonality. Further analysis is then based on Zt. This is considered an appropriate method if the focus is on periodic and regular announcements or other events that repeat themselves periodically, like the US macroeconomic employment report or producer price index announcements (cf. Bollerslev et al. (2000)). If the seasonality is in fact of deterministic nature, Demetrescu and Hassler (2007) show that neglecting the deterministic seasonality distorts the performance of unit root tests, so that the Dickey-Fuller test becomes oversized and loses power at the same time.

The flexible Fourier form – which is a linear combination of sines and cosines – captures slowly varying but still deterministic seasonality (Gallant (1981)). The original data is regressed on sines and cosines that depend on the seasonal frequencies , such that

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