In this paper we propose a sequential testing approach for a structural change in the variance of a time series, which amounts to a procedure with a controlled asymptotic size as we repeat the test. Our approach builds on that taken in Chu, Stinchcombe and White (1996) for structural change in the parameters of a linear regression model. We provide simulation evidence to examine the empirical size and power of our procedure. We apply our approach to 14 weekly observed European exchange rates for 1985-1998 and we find ample evidence for the presence of structural changes in nominal exchange rate volatility, where generally a reduction of volatility is found.
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Paper provided by Erasmus University of Rotterdam - Econometric Institute in its series Papers with number
9925/a.
Find related papers by JEL classification: C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation F30 - International Economics - - International Finance - - - General F31 - International Economics - - International Finance - - - Foreign Exchange
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