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Jumps in the Volatility of Financial Markets

Author Info

  • PERRON, Benoît

Abstract

Recent work suggests that the conditional variance of financial returns may exhibit sudden jumps. This paper extends a non-parametric procedure to detect discontinuities in otherwise continuous functions of a random variable developed by Delgado and Hidalgo (1996) to higher conditional moments, in particular the conditional variance. Simulation results show that the procedure provides reasonable estimates of the number and location of jumps. This procedure detects several jumps in the conditional variance of daily returns on the S&P 500 index.

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File URL: http://hdl.handle.net/1866/476
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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 9912.

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Length: 31 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:mtl:montde:9912
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Keywords: jum; conditional variance; kernel; one-sided windows;

Find related papers by JEL classification:

  • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
  • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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  1. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
  2. 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.
  3. Rabemananjara, R & Zakoian, J M, 1993. "Threshold Arch Models and Asymmetries in Volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 31-49, Jan.-Marc.
  4. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
  5. Dueker, Michael J, 1997. "Markov Switching in GARCH Processes and Mean-Reverting Stock-Market Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 26-34, January.
  6. Adrian R. Pagan & G. William Schwert, 1990. "Alternative Models For Conditional Stock Volatility," NBER Working Papers 2955, National Bureau of Economic Research, Inc.
  7. Jushan Bai, 1995. "Estimating Multiple Breaks One at a Time," Working papers 95-18, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  9. van Norden, Simon, 1996. "Regime Switching as a Test for Exchange Rate Bubbles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 219-51, May-June.
  10. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
  11. Zakoian, Jean-Michel, 1994. "Threshold heteroskedastic models," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 931-955, September.
  12. Masry, Elias & Tjøstheim, Dag, 1995. "Nonparametric Estimation and Identification of Nonlinear ARCH Time Series Strong Convergence and Asymptotic Normality: Strong Convergence and Asymptotic Normality," Econometric Theory, Cambridge University Press, vol. 11(02), pages 258-289, February.
  13. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  14. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
  15. Christian Francq & Jean-Michel Zakoïan, 1999. "Linear-Representations Based Estimation of Switching-Regime GARCH Models," Working Papers 99-57, Centre de Recherche en Economie et Statistique.
  16. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  17. Pagan, Adrian & Ullah, Aman, 1988. "The Econometric Analysis of Models with Risk Terms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(2), pages 87-105, April.
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Cited by:

  1. Bandi, Federico M. & Nguyen, Thong H., 2003. "On the functional estimation of jump-diffusion models," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 293-328.
  2. Shinn-Juh Lin & Jian Yang, 2000. "Testing Shifts in Financial Models with Conditional Heteroskedasticity: An Empirical Distribution Function Approach," Econometric Society World Congress 2000 Contributed Papers 0063, Econometric Society.
  3. 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.

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