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Wavelet-based detection of outliers in volatility models

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  • Grané, Aurea
  • Veiga, Helena

Abstract

Outliers 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.

Suggested Citation

  • Grané, Aurea & Veiga, Helena, 2009. "Wavelet-based detection of outliers in volatility models," DES - Working Papers. Statistics and Econometrics. WS ws090403, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:ws090403
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    References listed on IDEAS

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    1. Seth A. Greenblatt, 1994. "Wavelets in Econometrics: An Application to Outlier Testing," Econometrics 9410001, University Library of Munich, Germany.
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    4. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. "On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    5. van Dijk, Dick & Franses, Philip Hans & Lucas, Andre, 1999. "Testing for ARCH in the Presence of Additive Outliers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 539-562, Sept.-Oct.
    6. M. Angeles Carnero & Daniel Peña & Esther Ruiz, 2007. "Effects of outliers on the identification and estimation of GARCH models," Journal of Time Series Analysis, Wiley Blackwell, vol. 28(4), pages 471-497, July.
    7. Shinichi Sakata & Halbert White, 1998. "High Breakdown Point Conditional Dispersion Estimation with Application to S&P 500 Daily Returns Volatility," Econometrica, Econometric Society, vol. 66(3), pages 529-568, May.
    8. Franses, Philip Hans & Ghijsels, Hendrik, 1999. "Additive outliers, GARCH and forecasting volatility," International Journal of Forecasting, Elsevier, vol. 15(1), pages 1-9, February.
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    Cited by:

    1. Li, Yushu, 2013. "Wavelet based outlier correction for power controlled turning point detection in surveillance systems," Economic Modelling, Elsevier, vol. 30(C), pages 317-321.
    2. Li, Yushu & Reese, Simon, 2012. "Wavelet Improvement in Turning Point Detection using a Hidden Markov Model," Working Papers 2012:14, Lund University, Department of Economics, revised 05 Apr 2014.
    3. Yushu Li & Simon Reese, 2014. "Wavelet improvement in turning point detection using a hidden Markov model: from the aspects of cyclical identification and outlier correction," Computational Statistics, Springer, vol. 29(6), pages 1481-1496, December.

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    More about this item

    Keywords

    Outliers;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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