Abstract
This study assess the nonlinear behavior of U.K. Construction and Real Estate indices. Standard unit root tests show that both time series are I(1) processes. However, the empirical results show that the returns series for both indices deviate from the null hypothesis of white noise. Moreover, we have found evidence of nonlinearity but strong evidence against chaos for the returns series. Further tests show that the source of nonlinearity is rather different. Hence, the Construction index returns series displays weak nonlinear forecastability, typical of nonlinear deterministic processes, whereas the Real Estate index could be characterized as a stationary process about a nonlinear deterministic trend.
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Notes
It must be pointed out that any potential benefit derived from such knowledge may be short lived since it is likely to be competed away.
Currently there is no options trading on the Real Estate and Construction Indices.
http://www.ftse.com/Indices/UK_Indices/Downloads/AppendixB_Reference_Codes.pdf (accessed 10 November 2010).
Ibid.
FTSE Calculation methodology can be found at: http://www.ftse.com/Indices/UK_Indices/Downloads/uk_calculation.pdf (accessed 10 November 2010).
Testing for one unit root in the first-differenced data allows us to strongly reject the null hypothesis of a second unit root. Results are available upon request.
The evidence for Construction is weaker when using the Bartlett kernel.
These test statistics, with the exception of T 1(m) and T 2(m), can be computed using the program EasyReg, written by Herman J. Bierens and freely available at the URL http://econ.la.psu.edu/~hbierens/EASYREG.HTM.
is the information set at time t − 1.
As noted by these authors, however, the robustness of the tests to GARCH cannot automatically be taken to extend to other types of heteroskedasticity.
We are grateful to Professor Shitani for providing the computer code to compute the statistical tests concerning Lyapunov exponents, as described in Shintani and Linton (2004).
Hereafter, FK test.
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We acknowledge an anonymous referee for his/her useful comments which helped to improve the paper.
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Belaire-Franch, J., Opong, K.K. A Time Series Analysis of U.K. Construction and Real Estate Indices. J Real Estate Finan Econ 46, 516–542 (2013). https://doi.org/10.1007/s11146-011-9327-y
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DOI: https://doi.org/10.1007/s11146-011-9327-y