Powerful Tests for Structural Changes in Volatility

40 Pages Posted: 27 Nov 2012

See all articles by Ke-Li Xu

Ke-Li Xu

Indiana University Bloomington

Date Written: August 14, 2012

Abstract

Detecting structural changes in volatility is important for understanding volatility dynamics and stylized facts observed for financial returns such as volatility persistence. We propose modified CUSUM and LM tests that are built on a robust estimator of the long run variance of squared series. We establish conditions under which the new tests have standard null distributions and diverge faster than standard tests under the alternative. The theory allows smooth and abrupt structural changes that can be small. The smoothing parameter is automatically selected such that the proposed test has good finite-sample size and meanwhile achieves decent power gain.

Keywords: CUSUM test, LM test, nonparametric volatility estimation, nonstationary volatility, volatility break

JEL Classification: C12, C22

Suggested Citation

Xu, Ke-Li, Powerful Tests for Structural Changes in Volatility (August 14, 2012). Journal of Econometrics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2181194

Ke-Li Xu (Contact Author)

Indiana University Bloomington ( email )

100 S. Woodlawn Ave.
Department of Economics, Wylie Hall
Bloomington, IN 47405-7104
United States

HOME PAGE: http://sites.google.com/view/kelixu

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