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A new fluctuation test for constant variances with applications to finance

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Author Info

  • Dominik Wied

    ()

  • Matthias Arnold

    ()

  • Nicolai Bissantz

    ()

  • Daniel Ziggel

    ()

Abstract

We present a test to determine whether variances of time series are constant over time. The test statistic is a suitably standardized maximum of cumulative first and second moments. We apply the test to time series of various assets and find that the test performs well in applications. Moreover, we propose a portfolio strategy based on our test which hedges against potential financial crises and show that it works in practice. Copyright Springer-Verlag 2012

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File URL: http://hdl.handle.net/10.1007/s00184-011-0371-7
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Bibliographic Info

Article provided by Springer in its journal Metrika.

Volume (Year): 75 (2012)
Issue (Month): 8 (November)
Pages: 1111-1127

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Handle: RePEc:spr:metrik:v:75:y:2012:i:8:p:1111-1127

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Web page: http://www.springerlink.com/link.asp?id=102509

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Related research

Keywords: Econometric modeling; Finance; Portfolio optimization; Structural breaks; Variance;

References

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  11. Pedro Galeano & Daniel Peña, 2004. "Variance Changes Detection In Multivariate Time Series," Statistics and Econometrics Working Papers ws041305, Universidad Carlos III, Departamento de Estadística y Econometría.
  12. Robert M. De Jong & James Davidson, 2000. "Consistency of Kernel Estimators of Heteroscedastic and Autocorrelated Covariance Matrices," Econometrica, Econometric Society, vol. 68(2), pages 407-424, March.
  13. Ploberger, Werner & Krämer;, Walter, 1990. "The Local Power of the CUSUM and CUSUM of Squares Tests," Econometric Theory, Cambridge University Press, vol. 6(03), pages 335-347, September.
  14. Campbell, Rachel A.J. & Forbes, Catherine S. & Koedijk, Kees G. & Kofman, Paul, 2008. "Increasing correlations or just fat tails?," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 287-309, March.
  15. Andreou, Elena & Ghysels, Eric, 2006. "Monitoring disruptions in financial markets," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 77-124.
  16. Ploberger, Werner & Kramer, Walter, 1992. "The CUSUM Test with OLS Residuals," Econometrica, Econometric Society, vol. 60(2), pages 271-85, March.
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