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Testing for changes in volatility in heteroskedastic time series - a further examination

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  • de Pooter, M.D.
  • van Dijk, D.J.C.

Abstract

We consider tests for sudden changes in the unconditional volatility of conditionally heteroskedastic time series based on cumulative sums of squares. When applied to the original series these tests suffer from severe size distortions, where the correct null hypothesis of no volatility change is rejected much too frequently. Applying the tests to standardized residuals from an estimated GARCH model results in good size and reasonable power properties when testing for a single break in the variance. The tests also appear to be robust to different types of misspecification. An iterative algorithm is designed to test sequentially for the presence of multiple changes in volatility. An application to emerging markets stock returns clearly illustrates the properties of the different test statistics.

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File URL: http://repub.eur.nl/pub/1627/ei200438.pdf
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Bibliographic Info

Paper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 2004-38.

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Date of creation: 22 Sep 2004
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Handle: RePEc:ems:eureir:1627

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Related research

Keywords: CUSUM; GARCH models; change-point tests; emerging markets; structural breaks;

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References

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  1. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, Elsevier, vol. 43(1), pages 29-77, January.
  2. Elena Andreou & Eric Ghysels, 2002. "Detecting multiple breaks in financial market volatility dynamics," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 17(5), pages 579-600.
  3. Geert Bekaert & Campbell R. Harvey & Christian T. Lundblad, 2003. "Equity market liberalization in emerging markets," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 53-74.
  4. Giorgio De Santis & Selahattin Imrohoroglu, 1994. "Stock returns and volatility in emerging financial markets," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 93, Federal Reserve Bank of Minneapolis.
  5. Elena Andreou & Eric Ghysels, 2004. "The Impact of Sampling Frequency and Volatility Estimators on Change-Point Tests," CIRANO Working Papers, CIRANO 2004s-25, CIRANO.
  6. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 34(01), pages 33-55, March.
  7. Berkes, István & Horváth, Lajos, 2003. "Limit results for the empirical process of squared residuals in GARCH models," Stochastic Processes and their Applications, Elsevier, Elsevier, vol. 105(2), pages 271-298, June.
  8. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  9. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report, Federal Reserve Bank of Minneapolis 157, Federal Reserve Bank of Minneapolis.
  10. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9552, Universite de Montreal, Departement de sciences economiques.
  11. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 13(03), pages 315-352, June.
  12. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 74(1), pages 3-30, September.
  13. Liu, Ming, 2000. "Modeling long memory in stock market volatility," Journal of Econometrics, Elsevier, Elsevier, vol. 99(1), pages 139-171, November.
  14. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(1-2), pages 3-56, February.
  15. Bai, Jushan, 1999. "Likelihood ratio tests for multiple structural changes," Journal of Econometrics, Elsevier, Elsevier, vol. 91(2), pages 299-323, August.
  16. Thomas Mikosch & Catalin Starica, 2004. "Non-stationarities in financial time series, the long range dependence and the IGARCH effects," Econometrics, EconWPA 0412005, EconWPA.
  17. 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., John Wiley & Sons, Ltd., vol. 17(5), pages 601-616.
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Cited by:
  1. Ke-Li Xu & Peter C.B. Phillips, 2006. "Adaptive Estimation of Autoregressive Models with Time-Varying Variances," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1585R, Cowles Foundation for Research in Economics, Yale University, revised Nov 2006.
  2. Ali Babikir & Rangan Gupta & Chance Mwabutwa & Emmanuel Owusu-Sekyere, 2010. "Structural Breaks and GARCH Models of Stock Return Volatility: The Case of South Africa," Working Papers 201030, University of Pretoria, Department of Economics.
  3. Efe Çağlar Çağli & Pinar Evrim Mandaci & Pinar Hakan Kahyaoğlu, 2011. "Volatility Shifts and Persistence in Variance: Evidence from the Sector Indices of Istanbul Stock Exchange," International Journal of Economic Sciences and Applied Research (IJESAR), Technological Educational Institute (TEI) of Kavala, Greece, Technological Educational Institute (TEI) of Kavala, Greece, vol. 4(3), pages 119-140, December.

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