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Testing for changes in volatility in heteroskedastic time series - a further examination

  • de Pooter, M.D.
  • van Dijk, D.J.C.

We consider tests for sudden changes in the unconditional volatility of conditionally heteroskedastic time series based on cumulative sums of squares. When applied to the original series these tests suffer from severe size distortions, where the correct null hypothesis of no volatility change is rejected much too frequently. Applying the tests to standardized residuals from an estimated GARCH model results in good size and reasonable power properties when testing for a single break in the variance. The tests also appear to be robust to different types of misspecification. An iterative algorithm is designed to test sequentially for the presence of multiple changes in volatility. An application to emerging markets stock returns clearly illustrates the properties of the different test statistics.

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Paper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 2004-38.

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Date of creation: 22 Sep 2004
Date of revision:
Handle: RePEc:ems:eureir:1627
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  1. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
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  3. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 33-55, March.
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  8. Elena Andreou & Eric Ghysels, 2004. "The Impact of Sampling Frequency and Volatility Estimators on Change-Point Tests," CIRANO Working Papers 2004s-25, CIRANO.
  9. Berkes, István & Horváth, Lajos, 2003. "Limit results for the empirical process of squared residuals in GARCH models," Stochastic Processes and their Applications, Elsevier, vol. 105(2), pages 271-298, June.
  10. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(03), pages 315-352, June.
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  12. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 3-56, February.
  13. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
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  16. Bai, Jushan, 1999. "Likelihood ratio tests for multiple structural changes," Journal of Econometrics, Elsevier, vol. 91(2), pages 299-323, August.
  17. Geert Bekaert & Campbell R. Harvey & Christian T. Lundblad, 2003. "Equity market liberalization in emerging markets," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 53-74.
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