Sparse Change-Point Har Models for Realized Variance

CRREP working paper 2016-07

32 Pages Posted: 30 Mar 2018

See all articles by Arnaud Dufays

Arnaud Dufays

CeReFiM. Université de Namur.; Université Laval

J. V. K. Rombouts

HEC Montreal; Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE); Center for Interuniversity Research and Analysis on Organization (CIRANO)

Date Written: December 1, 2016

Abstract

Change-point time series specifications constitute flexible models that capture unknown structural changes by allowing for switches in the model parameters. Nevertheless most models suffer from an over-parametrization issue since typically only one latent state variable drives the switches in all parameters. This implies that all parameters have to change when a break happens. To gauge whether and where there are structural breaks in realized variance, we introduce the sparse change-point HAR model. The approach controls for model parsimony by limiting the number of parameters which evolve from one regime to another. Sparsity is achieved thanks to employing a nonstandard shrinkage prior distribution. We derive a Gibbs sampler for inferring the parameters of this process. Simulation studies illustrate the excellent performance of the sampler. Relying on this new framework, we study the stability of the HAR model using realized variance series of several major international indices between January 2000 and August 2015.

Keywords: Realized variance, Bayesian inference, Time series, Shrinkage prior, Change-point model, Online forecasting

JEL Classification: C11, C15, C22, C51

Suggested Citation

Dufays, Arnaud and Rombouts, Jeroen, Sparse Change-Point Har Models for Realized Variance (December 1, 2016). CRREP working paper 2016-07, Available at SSRN: https://ssrn.com/abstract=3149095 or http://dx.doi.org/10.2139/ssrn.3149095

Arnaud Dufays (Contact Author)

CeReFiM. Université de Namur. ( email )

Rempart de la Vierge 8
Namur, Namur 5000
Belgium

Université Laval ( email )

2214 Pavillon J-A. DeSeve
Quebec, Quebec G1K 7P4
Canada

Jeroen Rombouts

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE) ( email )

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

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