Detecting multiple breaks in financial market volatility dynamics

Abstract

SUMMARYThe paper evaluates the performance of several recently proposed tests for structural breaks in the conditional variance dynamics of asset returns. The tests apply to the class of ARCH and SV type processes as well as data-driven volatility estimators using high-frequency data. In addition to testing for the presence of breaks, the statistics identify the number and location of multiple breaks. We study the size and power of the new tests for detecting breaks in the conditional variance under various realistic univariate heteroscedastic models, change-point hypotheses and sampling schemes. The paper concludes with an empirical analysis using data from the stock and FX markets for which we find multiple breaks associated with the Asian and Russian financial crises. These events resulted in changes in the dynamics of volatility of asset returns in the samples prior and post the breaks.

Volatility persistence in crude oil markets

“…1 See (2002, 2003) and Vo (2009) model conditional volatility of crude oil futures prices with a Markow switching GARCH model and find regime shifts. In our paper, we detect the shift points in (unconditional) variance, not the probabilities associated with those shifts and without restricting the number of regimes to two as in the Markov switching model.…”

Evaluations of Likelihood‐Based Surveillance of Volatility

“…The methods are monitoring the returns, denoted by r, of the stock market index Standard and Poor's 500 (S&P500). Andreou and Ghysels (2002) applied a number of tests for homogeneity in the variance of the returns of S&P500 for the period 4 January 1989-19 October 2001 (3229 observations). The tests were made retrospectively that is a historical data set of given length were analyzed.…”

Testing for changing volatility

“…Clark (2011 finds empirical evidence strongly suggesting that the volatility of U.S. macroeconomic variables rises sharply during the severe recession of [2007][2008][2009]. In financial markets, Andreou and Ghysels (2002) examine the volatility dynamics of international stock and exchange rate returns, and detect multiple breaks associated with the Asian and Russian financial crises. Mikosch and Stǎricǎ (2004), and Liu and Maheu (2008) also find strong evidence of structural changes relating to shifts in the variance of S&P 500 returns.…”