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Tests for Volatility Shifts in Garch Against Long-Range Dependence

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  • Taewook Lee
  • Moosup Kim
  • Changryong Baek

Abstract

type="main" xml:id="jtsa12098-abs-0001"> Many empirical findings show that volatility in financial time series exhibits high persistence. Some researchers argue that such persistency is due to volatility shifts in the market, while others believe that this is a natural fluctuation explained by stationary long-range dependence models. These two approaches confuse many practitioners, and forecasts for future volatility are dramatically different depending on which models to use. In this article, therefore, we consider a statistical testing procedure to distinguish volatility shifts in generalized AR conditional heteroscedasticity (GARCH) model against long-range dependence. Our testing procedure is based on the residual-based cumulative sum test, which is designed to correct the size distortion observed for GARCH models. We examine the validity of our method by providing asymptotic distributions of test statistic. Also, Monte Carlo simulations study shows that our proposed method achieves a good size while providing a reasonable power against long-range dependence. It is also observed that our test is robust to the misspecified GARCH models.

Suggested Citation

  • Taewook Lee & Moosup Kim & Changryong Baek, 2015. "Tests for Volatility Shifts in Garch Against Long-Range Dependence," Journal of Time Series Analysis, Wiley Blackwell, vol. 36(2), pages 127-153, March.
    • Handle: RePEc:bla:jtsera:v:36:y:2015:i:2:p:127-153
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    Cited by:

    1. Song, Junmo & Baek, Changryong, 2019. "Detecting structural breaks in realized volatility," Computational Statistics & Data Analysis, Elsevier, vol. 134(C), pages 58-75.
    2. Byungsoo Kim & Junmo Song & Changryong Baek, 2021. "Robust test for structural instability in dynamic factor models," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 73(4), pages 821-853, August.
    3. Lee, Taewook & Baek, Changryong, 2020. "Block wild bootstrap-based CUSUM tests robust to high persistence and misspecification," Computational Statistics & Data Analysis, Elsevier, vol. 150(C).

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