The Effects of Additive Outliers and Measurement Errors when Testing for Structural Breaks in Variance
This paper discusses the asymptotic and finite-sample properties of CUSUM-based tests for detecting structural breaks in volatility in the presence of stochastic contamination, such as additive outliers or measurement errors. This analysis is particularly relevant for financial data, on which these tests are commonly used to detect variance breaks. In particular, we focus on the tests by Inclán and Tiao [IT] (1994) and Kokoszka and Leipus [KL] (1998, 2000), which have been intensively used in the applied literature. Our results are extensible to related procedures. We show that the asymptotic distribution of the IT test can largely be affected by sample contamination, whereas the distribution of the KL test remains invariant. Furthermore, the break-point estimator of the KL test renders consistent estimates. In spite of the good large-sample properties of this test, large additive outliers tend to generate power distortions or wrong break-date estimates in small samples.
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- Ai Deng & Pierre Perron, 2006.
"The Limit Distribution of the CUSUM of Squares Test Under General Mixing Conditions,"
Boston University - Department of Economics - Working Papers Series
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- Ai Deng & Pierre Perron, 2007. "A Non-local Perspective on the Power Properties of the CUSUM and CUSUM of Squares Tests for Structural Change," Boston University - Department of Economics - Working Papers Series WP2007-019, Boston University - Department of Economics.
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- Elena Andreou, 2004.
"The Impact of Sampling Frequency and Volatility Estimators on Change-Point Tests,"
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Society for Financial Econometrics, vol. 2(2), pages 290-318.
- Elena Andreou & Eric Ghysels, 2004. "The Impact of Sampling Frequency and Volatility Estimators on Change-Point Tests," CIRANO Working Papers 2004s-25, CIRANO.
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