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The Effects of Additive Outliers and Measurement Errors when Testing for Structural Breaks in Variance

  • Paulo M. M. Rodrigues
  • Antonio Rubia

This paper discusses the asymptotic and finite-sample properties of CUSUM-based tests for detecting structural breaks in volatility in the presence of stochastic contamination, such as additive outliers or measurement errors. This analysis is particularly relevant for financial data, on which these tests are commonly used to detect variance breaks. In particular, we focus on the tests by Inclán and Tiao [IT] (1994) and Kokoszka and Leipus [KL] (1998, 2000), which have been intensively used in the applied literature. Our results are extensible to related procedures. We show that the asymptotic distribution of the IT test can largely be affected by sample contamination, whereas the distribution of the KL test remains invariant. Furthermore, the break-point estimator of the KL test renders consistent estimates. In spite of the good large-sample properties of this test, large additive outliers tend to generate power distortions or wrong break-date estimates in small samples.

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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 73 (2011)
Issue (Month): 4 (08)
Pages: 449-468

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Handle: RePEc:bla:obuest:v:73:y:2011:i:4:p:449-468
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  1. Chen, Gongmeng & Choi, Yoon K. & Zhou, Yong, 2005. "Nonparametric estimation of structural change points in volatility models for time series," Journal of Econometrics, Elsevier, vol. 126(1), pages 79-114, May.
  2. Deng, Ai & Perron, Pierre, 2008. "The Limit Distribution Of The Cusum Of Squares Test Under General Mixing Conditions," Econometric Theory, Cambridge University Press, vol. 24(03), pages 809-822, June.
  3. Elena Andreou, 2004. "The Impact of Sampling Frequency and Volatility Estimators on Change-Point Tests," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(2), pages 290-318.
  4. Ai Deng & Pierre Perron, 2005. "A Non-local Perspective on the Power Properties of the CUSUM and CUSUM of Squares Tests for Structural Change," Boston University - Department of Economics - Working Papers Series WP2005-047, Boston University - Department of Economics.
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