Are There Structural Breaks in Realized Volatility?

Posted: 17 Jun 2008

See all articles by Chun Liu

Chun Liu

University of Toronto; Tsinghua University - School of Economics and Management

John M. Maheu

McMaster University - Michael G. DeGroote School of Business; RCEA

Date Written: Summer 2008

Abstract

Constructed from high-frequency data, realized volatility (RV) provides an accurate estimate of the unobserved volatility of financial markets. This paper uses a Bayesian approach to investigate the evidence for structural breaks in reduced form time-series models of RV. We focus on the popular heterogeneous autoregressive (HAR) models of the logarithm of realized volatility. Using Monte Carlo simulations we demonstrate that our estimation approach is effective in identifying and dating structural breaks. Applied to daily S, and P 500 data from 1993-2004, we find strong evidence of a structural break in early 1997. The main effect of the break is a reduction in the variance of log-volatility. The evidence of a break is robust to different models including a GARCH specification for the conditional variance of log(RV).

Keywords: C22, C11, G10, change point, GARCH, Gibbs sampling, marginal likelihood, realized volatility

Suggested Citation

Liu, Chun and Liu, Chun and Maheu, John M., Are There Structural Breaks in Realized Volatility? (Summer 2008). Journal of Financial Econometrics, Vol. 6, Issue 3, pp. 326-360, 2008, Available at SSRN: https://ssrn.com/abstract=1146711 or http://dx.doi.org/nbn006

Chun Liu

Tsinghua University - School of Economics and Management ( email )

Beijing, 100084
China

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

John M. Maheu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://profs.degroote.mcmaster.ca/ads/maheujm/

RCEA

Via Patara, 3
Rimini (RN), RN 47900
Italy

HOME PAGE: http://www.rcfea.org/

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