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Shifts in Individual Parameters of a GARCH Model

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  • Pedro Galeano
  • Ruey S. Tsay

Abstract

Most asset return series, especially those in high frequency, show high excess kurtosis and persistence in volatility that cannot be adequately described by the generalized conditional heteroscedastic (GARCH) model, even with heavy-tailed innovations. Many researchers have argued that these characteristics are due to shifts in volatility that may be associated with significant economic events such as financial crises. Indeed, several authors have investigated the case of pure structural changes, in which all of the parameters in the GARCH model are assumed to change simultaneously. In this paper, we take an alternative approach by studying the case in which changes occur in individual parameters of a GARCH model. We investigate the impacts of such changes on the underlying return series and its volatility, and propose an iterative procedure to detect them. In all cases, the changes affect permanently the level of the volatility, but in some cases, the changes also alter the dynamic structure of the volatility series. Monte Carlo experiments are used to investigate the performance of the proposed procedure in finite samples, and real examples are used to demonstrate the impacts of detected volatility changes and the efficacy of the proposed procedure. Practical implications of the parameter changes in financial applications are also discussed. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oupjournals.org, Oxford University Press.

Suggested Citation

  • Pedro Galeano & Ruey S. Tsay, 2010. "Shifts in Individual Parameters of a GARCH Model," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 8(1), pages 122-153, Winter.
  • Handle: RePEc:oup:jfinec:v:8:y:2010:i:1:p:122-153
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbp007
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    Cited by:

    1. Marvasti, Akbar & Lamberte, Antonio, 2016. "Commodity price volatility under regulatory changes and disaster," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 355-361.
    2. Peña Sánchez de Rivera, Daniel & Kaiser Remiro, Regina & Badagian Baharian, Ana Laura, 2013. "The change-point problem and segmentation of processes with conditional heteroskedasticity," DES - Working Papers. Statistics and Econometrics. WS ws131718, Universidad Carlos III de Madrid. Departamento de Estadística.
    3. González-Hermosillo, Brenda & Johnson, Christian, 2017. "Transmission of financial stress in Europe: The pivotal role of Italy and Spain, but not Greece," Journal of Economics and Business, Elsevier, vol. 90(C), pages 49-64.
    4. Galeano, Pedro & Wied, Dominik, 2014. "Multiple break detection in the correlation structure of random variables," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 262-282.
    5. Dag Tjøstheim, 2012. "Rejoinder on: Some recent theory for autoregressive count time series," TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 21(3), pages 469-476, September.
    6. repec:bap:journl:170204 is not listed on IDEAS
    7. Pedro Galeano, 2012. "Comments on: Some recent theory for autoregressive count time series," TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 21(3), pages 455-458, September.
    8. Korkmaz, Turhan & Çevik, Emrah İ. & Atukeren, Erdal, 2012. "Return and volatility spillovers among CIVETS stock markets," Emerging Markets Review, Elsevier, vol. 13(2), pages 230-252.
    9. repec:spr:testjl:v:26:y:2017:i:2:d:10.1007_s11749-016-0513-3 is not listed on IDEAS

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