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Long Memory and Structural Breaks in Realized Volatility: An Irreversible Markov Switching Approach

Author

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  • Nima Nonejad

    (Aarhus University and CREATES)

Abstract

This paper proposes a model that simultaneously captures long memory and structural breaks. We model structural breaks through irreversible Markov switching or so-called change-point dynamics. The parameters subject to structural breaks and the unobserved states which determine the position of the structural breaks are sampled from the joint posterior density by sampling from their respective conditional posteriors using Gibbs sampling and Metropolis-Hastings. Monte Carlo simulations demonstrate that the proposed estimation approach is effective in identifying and dating structural breaks. Applied to daily S&P 500 data, one finds strong evidence of three structural breaks. The evidence of these breaks is robust to different specifications including a GARCH specification for the conditional variance of volatility.

Suggested Citation

  • Nima Nonejad, 2013. "Long Memory and Structural Breaks in Realized Volatility: An Irreversible Markov Switching Approach," CREATES Research Papers 2013-26, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2013-26
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Long memory; Structural breaks; Change-points; Gibbs sampling;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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