Structural Breaks in Realized Volatility: A Cautionary Tale

18 Pages Posted: 21 Aug 2019

Date Written: June 2, 2019

Abstract

Autoregressive models such as the heterogeneous autoregressive (HAR) model capture the linear footprint inherent in realized volatility. We cast the problem of estimating structural breaks in the autoregressive volatility dynamics as a model selection problem. Interestingly, we find the number of breaks to be heavily influenced by Box-Cox transformations applied to realized volatility series of eight stock market indices: For example, while we find breaks in the original series, no breaks are found in log-realized volatility, a measure often used in applied research. These transformations change the autoregressive dynamics of the series and thus affect the detection of structural breaks.

Keywords: realized volatility, Box-Cox transformation, structural breaks, group Lasso

JEL Classification: C22, C52, G15

Suggested Citation

Behrendt, Simon, Structural Breaks in Realized Volatility: A Cautionary Tale (June 2, 2019). Available at SSRN: https://ssrn.com/abstract=3439067 or http://dx.doi.org/10.2139/ssrn.3439067

Simon Behrendt (Contact Author)

Zeppelin University ( email )

Am Seemooser Horn 20
Friedrichshafen, Lake Constance 88045
Germany

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