Unit root test with high-frequency data

Sébastien Laurent, Shuping Shi

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)
56 Downloads (Pure)


Deviations of asset prices from the random walk dynamic imply the predictability of asset returns and thus have important implications for portfolio construction and risk management. This paper proposes a real-time monitoring device for such deviations using intraday high-frequency data. The proposed procedures are based on unit root tests with in-fill asymptotics but extended to take the empirical features of high-frequency financial data (particularly jumps) into consideration. We derive the limiting distributions of the tests under both the null hypothesis of a random walk with jumps and the alternative of mean reversion/explosiveness with jumps. The limiting results show that ignoring the presence of jumps could potentially lead to severe size distortions of both the standard left-sided (against mean reversion) and right-sided (against explosiveness) unit root tests. The simulation results reveal satisfactory performance of the proposed tests even with data from a relatively short time span. As an illustration, we apply the procedure to the Nasdaq composite index at the 10-minute frequency over two periods: around the peak of the dot-com bubble and during the 2015-2106 stock market sell-off. We find strong evidence of explosiveness in asset prices in late 1999 and mean reversion in late 2015. We also show that accounting for jumps when testing the random walk hypothesis on intraday data is empirically relevant and that ignoring jumps can lead to different conclusions.
Original languageEnglish
Pages (from-to)113-171
Number of pages59
JournalEconometric Theory
Issue number1
Early online date8 Apr 2021
Publication statusPublished - Feb 2022

Bibliographical note

Copyright © The Author(s), 2021. Published by Cambridge University Press. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.


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