“Infinite Variance” and Research Strategy in Time Series Analysis

The possibility that some time series that arise in economics have error or innovation terms that come from infinite variance distributions throws doubt on most of the classical methods of analysis. The evidence in favor of infinite-variance is discussed and a variety of alternative explanations of the long-tailed property of observed distributions examined. Some of these alternative explanations are based on mixtures of distributions and suggest data-transformations that reduce or remove the problem. Clipping of the series seems to be a particularly useful technique and is applied to U.S. Treasury daily cash flow data.