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Detecting structural changes using wavelets

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  • Yazgan, M. Ege
  • Özkan, Harun

Abstract

We propose a powerful wavelet method to identify structural breaks in the mean of a process. If there is a structural change in the mean, the sum of the squared scaling coefficients absorbs more variation, leading to unequal weights for the variances of the wavelet and scaling coefficients. We use this feature of wavelets to design a statistical test for changes in the mean of an independently distributed process. We establish the limiting null distribution of our test and demonstrate that our test has good empirical size and substantive power relative to the existing alternatives especially for multiple breaks.

Suggested Citation

  • Yazgan, M. Ege & Özkan, Harun, 2015. "Detecting structural changes using wavelets," Finance Research Letters, Elsevier, vol. 12(C), pages 23-37.
    • Handle: RePEc:eee:finlet:v:12:y:2015:i:c:p:23-37
    DOI: 10.1016/j.frl.2014.12.003
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    References listed on IDEAS

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    Cited by:

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    2. Jiang, Meihui & An, Haizhong & Jia, Xiaoliang & Sun, Xiaoqi, 2017. "The influence of global benchmark oil prices on the regional oil spot market in multi-period evolution," Energy, Elsevier, vol. 118(C), pages 742-752.
    3. Ardila, Diego & Sornette, Didier, 2016. "Dating the financial cycle with uncertainty estimates: a wavelet proposition," Finance Research Letters, Elsevier, vol. 19(C), pages 298-304.
    4. Alqaralleh, Huthaifa & Canepa, Alessandra & Chini, Zanetti, 2021. "Financial Contagion During the Covid-19 Pandemic: A Wavelet-Copula-GARCH Approach," Department of Economics and Statistics Cognetti de Martiis. Working Papers 202110, University of Turin.
    5. Salih Ulev & Mervan Selçuk, 2022. "Testing the Weak-Form Market Efficiency for the Islamic Market Indices: Evidence from Fourier Wavelet ADF Unit Root Test," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 9(2), pages 315-329, July.

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    More about this item

    Keywords

    Structural change tests; Structural break tests; Wavelets; Maximum overlap discrete wavelet transformation;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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