Modeling and forecasting outliers and level shifts in absolute returns
AbstractDue to high and low volatility periods, time series of absolute returns experience temporary level shifts (that is, periods with outliers) which differ in length and size. In this paper we put forward a new model which can describe and forecast the location and size of such levelshifts. Our so called Switching Regime Censored Latent Effects Autoregression [SR-CLEAR] assumes that technical trading rules may have explanatory value for future volatility. It is assumed that these rules have a time-varying effect on absolute returns, and that this effect appears as an outlier or a level shift. We apply the SR-CLEAR model to nine stock markets and we document its excellent fit and competitive forecasting ability.
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Bibliographic InfoPaper provided by Erasmus University Rotterdam, Econometric Institute in its series Econometric Institute Report with number EI 2001-34.
Date of creation: 13 Nov 2001
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outliers; censored latent effects; absolute returns; temporary level shifts;
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- Richard Paap & Philip Hans Franses & Marco Van Der Leij, 2002. "Modelling and forecasting level shifts in absolute returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 601-616.
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