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Evaluations of likelihood based surveillance of volatility

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  • Bock, David

    ()
    (Statistical Research Unit, Department of Economics, School of Business, Economics and Law, Göteborg University)

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    Abstract

    The volatility of asset returns are important in finance. Different likelihood based methods of statistical surveillance for detecting a change in the variance are evaluated. The differences are how the partial likelihood ratios are weighted. The full likelihood ratio, Shiryaev-Roberts, Shewhart and the CUSUM methods are derived in case of an independent and identically distributed Gaussian process. The behavior of the methods is studied both when there is no change and when the change occurs at different time points. The false alarms are controlled by the median run length. Differences and limiting equalities of the methods are shown. The performances when the process parameters for which the methods are optimized for differ from the true values of the parameters are evaluated. The methods are illustrated on a period of Standard and Poor’s 500 stock market index.

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    File URL: http://hdl.handle.net/2077/8477
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    Bibliographic Info

    Paper provided by Statistical Research Unit, Department of Economics, School of Business, Economics and Law, University of Gothenburg in its series Research Reports with number 2007:9.

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    Length: 20 pages
    Date of creation: 01 Jan 2007
    Date of revision:
    Handle: RePEc:hhs:gunsru:2007_009

    Contact details of provider:
    Postal: Statistical Research Unit, University of Gothenburg, Box 640, SE 40530 GÖTEBORG
    Web page: http://www.statistics.gu.se/

    Related research

    Keywords: surveillance; statistical process control; monitoring; likelihood ratio; Shewhart; CUSUM;

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