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Test for Breaks in the Conditional Co-Movements of Asset Returns

  • Elena Andreou
  • Eric Ghysels

We propose procedures designed to uncover structural breaks in the co-movements of financial markets. A reduced form approach is introduced that can be considered as a two stage method for reducing dimensionality of multivariate heteroskedastic conditional volatility models through marginalization. The main advantage is that one can use returns normalized by volatility filters that are purely data-driven and construct general conditional covariance dynamic specifications. The main thrust of our procedure is to examine change-points in the co-movements of normalized returns. We document, using a ten year period of two representative high frequency FX series, that regression models with non-Gaussian errors describe adequately their co-movements. Change-points are detected in the conditional covariance of the DM/US$ and YN/US$ normalized returns over the decade 1986-1996.

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Paper provided by University of Cyprus Department of Economics in its series University of Cyprus Working Papers in Economics with number 3-2003.

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Length: 41 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:ucy:cypeua:3-2003
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