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Flexible Fourier form for volatility breaks

Author

Listed:
  • Li Jing

    (Miami University, Department of Economics, 800 H High Street, Oxford, OH 45056, USA, Phone: 5135294393)

  • Enders Walte

    (University of Alabama, Department of Economics and Finance, Tuscaloosa, AL 35487, USA)

Abstract

This paper proposes a class of models: TRIARCH/TRIGARCH models that account for structural breaks in conditional variance using a variant of the flexible Fourier form. Based on the new model, three likelihood multiplier tests are proposed for the null hypotheses of (1) homoskedasticity in the presence of unknown structural breaks; (2) no structural changes in conditional variance; and (3) Integrated GARCH effect. The in-sample fit and out-of-sample forecasts of the TRIGARCH model and GARCH model are compared by simulations. We apply the new models to the SP500 returns. Our finding indicates level shifts in variance, and therefore, the almost integration indicated by the GARCH(1,1) model may be spurious.

Suggested Citation

  • Li Jing & Enders Walte, 2018. "Flexible Fourier form for volatility breaks," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 22(1), pages 1-19, February.
    • Handle: RePEc:bpj:sndecm:v:22:y:2018:i:1:p:19:n:1
    DOI: 10.1515/snde-2016-0039
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    Cited by:

    1. Alper Gormus & Saban Nazlioglu & Steven L. Beach, 2023. "Environmental, Social, and Governance Considerations in WTI Financialization through Energy Funds," JRFM, MDPI, vol. 16(4), pages 1-17, April.
    2. Elsayed, Ahmed H. & Gozgor, Giray & Lau, Chi Keung Marco, 2022. "Risk transmissions between bitcoin and traditional financial assets during the COVID-19 era: The role of global uncertainties," International Review of Financial Analysis, Elsevier, vol. 81(C).
    3. Nazlioglu, Saban & Gupta, Rangan & Bouri, Elie, 2020. "Movements in international bond markets: The role of oil prices," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 47-58.
    4. Marcos Velazquez & Alper Gormus & Nima Vafai, 2023. "The Dynamic Dependency between a Cryptocurrency ETF and ETFs Representing Conventional Asset Classes," JRFM, MDPI, vol. 16(9), pages 1-14, September.
    5. Nazlioglu, Saban & Gupta, Rangan & Gormus, Alper & Soytas, Ugur, 2020. "Price and volatility linkages between international REITs and oil markets," Energy Economics, Elsevier, vol. 88(C).

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