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Powerful tests for structural changes in volatility

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  • Xu, Ke-Li

Abstract

Detecting structural changes in volatility is important for understanding volatility dynamics and stylized facts observed for financial returns such as volatility persistence. We propose modified CUSUM and LM tests that are built on a robust estimator of the long-run variance of squared series. We establish conditions under which the new tests have standard null distributions and diverge faster than standard tests under the alternative. The theory allows smooth and abrupt structural changes that can be small. The smoothing parameter is automatically selected such that the proposed test has good finite-sample size and meanwhile achieves decent power gain.

Suggested Citation

  • Xu, Ke-Li, 2013. "Powerful tests for structural changes in volatility," Journal of Econometrics, Elsevier, vol. 173(1), pages 126-142.
  • Handle: RePEc:eee:econom:v:173:y:2013:i:1:p:126-142
    DOI: 10.1016/j.jeconom.2012.11.001
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    Cited by:

    1. Matei Demetrescu & Christoph Hanck & Robinson Kruse, 2016. "Fixed-b Inference in the Presence of Time-Varying Volatility," CREATES Research Papers 2016-01, Department of Economics and Business Economics, Aarhus University.
    2. David Harris & Hsein Kew, 2014. "Portmanteau Autocorrelation Tests Under Q-Dependence And Heteroskedasticity," Journal of Time Series Analysis, Wiley Blackwell, vol. 35(3), pages 203-217, May.
    3. Sensoy, Ahmet, 2013. "Dynamic relationship between precious metals," Resources Policy, Elsevier, vol. 38(4), pages 504-511.
    4. Hanck, Christoph & Demetrescu, Matei & Kruse, Robinson, 2015. "Fixed-b Asymptotics for t-Statistics in the Presence of Time-Varying Volatility," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112916, Verein für Socialpolitik / German Economic Association.
    5. Ke-Li Xu & Jui-Chung Yang, 2015. "Towards Uniformly Efficient Trend Estimation Under Weak/Strong Correlation and Non-stationary Volatility," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 42(1), pages 63-86, March.

    More about this item

    Keywords

    CUSUM test; LM test; Nonparametric volatility estimation; Nonstationary volatility; Volatility break;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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