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Test for Breaks in the Conditional Co-Movements of Asset Returns

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Author Info

  • Elena Andreou
  • Eric Ghysels

Abstract

We propose procedures designed to uncover structural breaks in the co-movements of financial markets. A reduced form approach is introduced that can be considered as a two stage method for reducing dimensionality of multivariate heteroskedastic conditional volatility models through marginalization. The main advantage is that one can use returns normalized by volatility filters that are purely data-driven and construct general conditional covariance dynamic specifications. The main thrust of our procedure is to examine change-points in the co-movements of normalized returns. We document, using a ten year period of two representative high frequency FX series, that regression models with non-Gaussian errors describe adequately their co-movements. Change-points are detected in the conditional covariance of the DM/US$ and YN/US$ normalized returns over the decade 1986-1996.

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File URL: http://papers.econ.ucy.ac.cy/RePEc/papers/3-2003.pdf
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Bibliographic Info

Paper provided by University of Cyprus Department of Economics in its series University of Cyprus Working Papers in Economics with number 3-2003.

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Length: 41 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:ucy:cypeua:3-2003

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Web page: http://www.econ.ucy.ac.cy

Related research

Keywords: change-point tests; conditional covariance; high-frequency financial data; multivariate GARCH models;

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References

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Citations

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Cited by:
  1. Elena Andreou & Eric Ghysels, 2004. "The Impact of Sampling Frequency and Volatility Estimators on Change-Point Tests," CIRANO Working Papers 2004s-25, CIRANO.
  2. Leonidas Tsiaras, 2010. "Dynamic Models of Exchange Rate Dependence Using Option Prices and Historical Returns," CREATES Research Papers 2010-35, School of Economics and Management, University of Aarhus.
  3. Patrick McGlenchy & Paul Kofman, 2004. "Structurally Sound Dynamic Index Futures Hedging," Econometric Society 2004 Australasian Meetings 80, Econometric Society.

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