Sparse change-point HAR Models for realized variance

Authors: Dufays, Arnaud; Rombouts, Jeroen V.K
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.
Document Type: Article de recherche
Issue Date: 25 April 2018
Open Access Date: 23 August 2019
Document version: AM
This document was published in: Econometric Reviews
Alternative version: 10.1080/07474938.2018.1454366
Collection:Articles publiés dans des revues avec comité de lecture

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