Adaptive Trend Estimation in Financial Time Series via Multiscale Change-Point-Induced Basis Recovery
Anna Louise Schröder, Piotr Fryźlewicz · Munich Personal RePEc Archive (Ludwig Maximilian University of Munich) · 2013
Low-frequency financial returns can be modelled as centered around piecewise-constant trend functions which change at certain points in time. We propose a new stochastic time series framework which captures this feature. The main ingredient of our model is a hierarchically-ordered oscillatory basis of simple piecewise-constant functions. It differs from the Fourier-like bases traditionally used in time series analysis in that it is determined by change-points, and hence needs to be estimated from the data before it can be used. The resulting model enables easy simulation and provides interpretable decomposition of nonstationarity into short- and long-term components. The model permits consistent estimation of the multiscale change-point-induced basis via binary segmentation, which results in a variable-span moving-average estimator of the current trend, and allows for short-term forecasting of the average return.