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Detection of Breakpoints in Volatility

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Viviana Fernandez ()

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Abstract

Financial time-series may exhibit breakpoints in unconditional variance due, possibly, to institutional changes. Accounting for such shifts is essential to risk management, forecasting, and hedging. In this article, we test for the presence of structural breaks in volatility by two approaches: the Iterative Cumulative Sum of Squares (ICSS) algorithm and wavelet analysis. We present a series of examples in which we compare both methods. Specifically, we look at the effect of the outbreak of the Asian crisis and the terrorist attacks of September 11, 2001 on Emerging Asia, Europe, Latin America and North America’s stock markets. In addition, we focus on the behavior of interest rates in Chile after the Central Bank switched its monetary policy interest rate from an inflation-indexed to a nominal target in August 2001. Our estimation results show that the number of shifts detected by the two methods is substantially reduced when filtering out the data for both conditional heteroskedasticity and serial correlation.

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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 194.

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Date of creation: 2004
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Handle: RePEc:edj:ceauch:194

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. James B. Ramsey & Camille Lampart, 1998. "The Decomposition of Economic Relationships by Time Scale Using Wavelets: Expenditure and Income," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 3(1). [Downloadable!]
  2. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
  3. Ser-Huang Poon & Clive W. J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
  4. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 33-55, March. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Boussard, Jean-Marc, 2007. "The future of the European Common Agricultural Policy : a new philosopy ?," Miscellaneous Papers 44423, Agecon Search. [Downloadable!]
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