In this paper, we show that spurious cointegration can occur when there are breaks in the variances of the innovation errors of time series, especially when the breaks occur early in the sample period. An empirical example is provided to demonstrate the case.

Basel II regulatory capital formula could imply substantial gaps between the long run PD and the short run historical average. Hence, banks might need to raise their short run historical average of internal PD substantially. Under through-the-cycle rating system, they might have to increase it...

In order to explain the U-shaped pattern of autocorrelations of stock returns i.e., autocorrelations starting around 0 for short-term horizons and becoming negative and then moving toward 0 for long-term horizons, researchers suggested the use of a state-space model consisting of an I(1)...