Wavelet-based detection of outliers in volatility models
AbstractOutliers in financial data can lead to model parameter estimation biases, invalid inferences and poor volatility forecasts. Therefore, their detection and correction should be taken seriously when modeling financial data. This paper focuses on these issues and proposes a general detection and correction method based on wavelets that can be applied to a large class of volatility models. The effectiveness of our proposal is tested by an intensive Monte Carlo study for six well known volatility models and compared to alternative proposals in the literature, before applying it to three daily stock market indexes. The Monte Carlo experiments show that our method is both very effective in detecting isolated outliers and outlier patches and much more reliable than other wavelet-based procedures since it detects a significant smaller number of false outliers.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Estadística y Econometría in its series Statistics and Econometrics Working Papers with number ws090403.
Date of creation: Jan 2009
Date of revision:
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Outliers; Outlier patches; Volatility models; Wavelets;
Other versions of this item:
- Grané, Aurea & Veiga, Helena, . "Wavelet-based detection of outliers in volatility models," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/3507, Universidad Carlos III de Madrid.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-22 (All new papers)
- NEP-ECM-2009-02-22 (Econometrics)
- NEP-ETS-2009-02-22 (Econometric Time Series)
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