Recursive computation of piecewise constant volatilities
Returns of risky assets are often modelled as the product of a volatility function and standard Gaussian white noise. Long range data cannot be adequately approximated by simple parametric models. The choice is between retaining simple models and segmenting the data, or to use a non-parametric approach. There is not always a clear dividing line between the two approaches. In particular, modelling the volatility as a piecewise constant function can be interpreted either as segmentation based on the simple model of constant volatility, or as an approximation to the observed volatility by a simple function. A precise concept of local approximation is introduced and it is shown that the sparsity problem of minimizing the number of intervals of constancy under constraints can be solved using dynamic programming. The method is applied to the daily returns of the German DAX index. In a short simulation study it is shown that the method can accurately estimate the number of breaks for simulated data without prior knowledge of this number.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 56 (2012)
Issue (Month): 11 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/csda|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jushan Bai & Pierre Perron, 1998.
"Estimating and Testing Linear Models with Multiple Structural Changes,"
Econometric Society, vol. 66(1), pages 47-78, January.
- Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
- Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Bernd Wilfling, 2003. "Interest Rate Volatility Prior to Monetary Union under Alternative Pre-Switch Regimes," German Economic Review, Verein für Socialpolitik, vol. 4, pages 433-457, November.
- Wilfling, Bernd, 2001. "Interest rate volatility prior to monetary union under alternative pre-switch regimes," HWWA Discussion Papers 143, Hamburg Institute of International Economics (HWWA).
- Torben G. Andersen & Luca Benzoni, 2008. "Realized volatility," Working Paper Series WP-08-14, Federal Reserve Bank of Chicago.
- Cătălin Stărică & Clive Granger, 2005. "Nonstationarities in Stock Returns," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 503-522, August.
- Catalin Starica & Clive Granger, 2004. "Non-stationarities in stock returns," Econometrics 0411016, EconWPA.
- José Curto & José Pinto & Gonçalo Tavares, 2009. "Modeling stock markets’ volatility using GARCH models with Normal, Student’s t and stable Paretian distributions," Statistical Papers, Springer, vol. 50(2), pages 311-321, March.
- Vassiliou, E. & Demetriou, I.C., 2005. "An adaptive algorithm for least squares piecewise monotonic data fitting," Computational Statistics & Data Analysis, Elsevier, vol. 49(2), pages 591-609, April.
- Davies, Paul Lyndon, 2006. "Long range financial data and model choice," Technical Reports 2006,21, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:csdana:v:56:y:2012:i:11:p:3623-3631. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.