A comparative study of volatility breaks

Arbeitspapier

In this paper we evaluate the performance of several structural break tests under various DGPs. Concretely we look at size and power properties of CUSUM based, LM and Wald volatility break tests. In a simulation study we derive the properties of the tests under shifts in the unconditional and conditional variance as well as for smooth shifts in the volatility process. Our results indicate that Wald tests have more power of detecting a change in the volatility than CUSUM and LM tests. This, however, goes along with the disadvantage of being slightly oversized. We further show that with huge outliers in the data the tests may exhibit non-monotonic power functions as the long-run variance of the squared return process is no longer finite. In an empirical example we determine the number and time of volatility breaks considering four equity and three exchange rate series. We find that in some situations the outcomes of the tests may vary substantially. Further we find fewer volatility breaks in the currency series than in the equity series.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Hannover Economic Papers (HEP) ; No. 558

Classification and Topics

• Classification: Wirtschaft ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Model Evaluation, Validation, and Selection ; Forecasting Models; Simulation Methods
• Subject: structural breaks ; variance shifts ; non-monotonic power

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Grote, Claudia ; Bertram, Philip
• Event: Veröffentlichung
• (who): Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät
• (where): Hannover
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/121774
• Last update: 10.03.2025, 11:43 AM CET