The Real Time Monitoring Test for Realized Volatility

29 Pages Posted: 20 Aug 2013 Last revised: 26 Aug 2013

See all articles by Cindy S.H. Wang

Cindy S.H. Wang

Catholic University of Louvain (UCL); Peking University, HSBC Business School

Cheng Hsiao

University of Southern California - Department of Economics; National Taiwan University; National Bureau of Economic Research (NBER)

Date Written: February 2, 2013

Abstract

This paper proposes a monitoring cumulative sum of squares (CUSQ)-type test for structural breaks in real-time via an auto-regressive (AR) approximation framework when data generating process (DGP) is a long memory process. The limiting distribution of the monitoring test follows a Brownian bridge and is free of long memory parameters under the null hypothesis of no break. The test is easy to implement and avoids the issue of spurious breaks found for some retrospective tests for long memory process. Neither does it need to use the bootstrap procedure to find the critical values. Monte Carlo simulations appear to confirm that there exists negligible size distortion and satisfactory power performances in finite samples. The procedure is then applied to monitor the real time pattern of realized volatilities of dollar-Deutschmark and dollar-Japanese Yen.

Keywords: CUSUM of squares tests, long memory, structural change, real time monitoring

Suggested Citation

Wang, Cindy S.H. and Hsiao, Cheng, The Real Time Monitoring Test for Realized Volatility (February 2, 2013). CAFE Research Paper No. 13.02, Available at SSRN: https://ssrn.com/abstract=2313231 or http://dx.doi.org/10.2139/ssrn.2313231

Cindy S.H. Wang

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Peking University, HSBC Business School ( email )

101, Section 2 Kuang Fu Road
Hsinchu, Taiwan 300
China

Cheng Hsiao (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

National Taiwan University

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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