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TIME IRREVERSIBLE COPULA-BASED MARKOV MODELS

Published online by Cambridge University Press:  16 April 2014

Brendan K. Beare  and
Juwon Seo
Brendan K. Beare*
Affiliation:
University of California, San Diego
Juwon Seo
Affiliation:
University of California, San Diego
*
*Address correspondence to Brendan Beare, Department of Economics, University of California-San Diego, 9500 Gilman Drive #0508, La Jolla, CA 92093-0508. E-mail: bbeare@ucsd.edu
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Abstract

Economic and financial time series frequently exhibit time irreversible dynamics. For instance, there is considerable evidence of asymmetric fluctuations in many macroeconomic and financial variables, and certain game theoretic models of price determination predict asymmetric cycles in price series. In this paper, we make two primary contributions to the econometric literature on time reversibility. First, we propose a new test of time reversibility, applicable to stationary Markov chains. Compared to existing tests, our test has the advantage of being consistent against arbitrary violations of reversibility. Second, we explain how a circulation density function may be used to characterize the nature of time irreversibility when it is present. We propose a copula-based estimator of the circulation density and verify that it is well behaved asymptotically under suitable regularity conditions. We illustrate the use of our time reversibility test and circulation density estimator by applying them to five years of Canadian gasoline price markup data.

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ARTICLES
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Econometric Theory , Volume 30 , Issue 5 , October 2014 , pp. 923 - 960
Copyright
Copyright © Cambridge University Press 2014 

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