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Likelihood Inference for Possibly Non-Stationary Processes via Adaptive Overdifferencing

Likelihood Inference for Possibly Non-Stationary Processes via Adaptive Overdifferencing

We make a simple observation that facilitates valid likelihood-based inference for the parameters of the popular ARFIMA or FARIMA model without requiring stationarity by allowing the upper bound for the memory parameter to exceed 0.5. We observe that estimating the parameters of a single non-stationary ARFIMA model is equivalent to estimating the parameters of a sequence of stationary ARFIMA models. This enables improved inference because many standard methods perform poorly when estimates are close to the boundary of the parameter space. It also allows us to leverage the wealth of likelihood approximations that have been introduced for estimating the parameters of a stationary process. We explore how estimation of the memory parameter depends on the upper bound and introduce adaptive procedures for choosing the upper bound. Via simulations, we examine the performance of our adaptive procedures for estimating the memory parameter when the true value is as large as 2.5. Our adaptive procedures estimate the memory parameter well, can be used to obtain confidence intervals for the memory parameter that achieve nominal coverage rates, and perform favorably relative to existing alternatives.

## Department of Mathematics and Statistics