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The Effects of Additive Outliers and Measurement Errors when Testing for Structural Breaks in Variance

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  • Paulo M.M. Rodrigues
  • Antonio Rubia

Abstract

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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  • Paulo M.M. Rodrigues & Antonio Rubia, 2010. "The Effects of Additive Outliers and Measurement Errors when Testing for Structural Breaks in Variance," Working Papers w201011, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w201011
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    References listed on IDEAS

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    3. Amélie Charles & Olivier Darné & Laurent Ferrara, 2018. "Does The Great Recession Imply The End Of The Great Moderation? International Evidence," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 745-760, April.
    4. Reese, Simon & Li, Yushu, 2013. "Testing for Structural Breaks in the Presence of Data Perturbations: Impacts and Wavelet Based Improvements," Working Papers 2013:36, Lund University, Department of Economics.
    5. Amélie Charles & Olivier Darné, 2021. "Econometric history of the growth–volatility relationship in the USA: 1919–2017," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 15(2), pages 419-442, May.
    6. Amélie Charles & Olivier Darné & Laurent Ferrara, 2018. "Does The Great Recession Imply The End Of The Great Moderation? International Evidence," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 745-760, April.
    7. Charles, Amélie & Darné, Olivier & Pop, Adrian, 2015. "Risk and ethical investment: Empirical evidence from Dow Jones Islamic indexes," Research in International Business and Finance, Elsevier, vol. 35(C), pages 33-56.
    8. Martín Saldías & Rafael Barbosa, 2013. "Option trade volume and volatility of banks’ stock returns," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

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