Long Memory and Structural Breaks in Realized Volatility: An Irreversible Markov Switching Approach

Nima Nonejad ()
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Nima Nonejad: Aarhus University and CREATES, Postal: Department of Economics and Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper proposes a model that simultaneously captures long memory and structural breaks. We model structural breaks through irreversible Markov switching or so-called change-point dynamics. The parameters subject to structural breaks and the unobserved states which determine the position of the structural breaks are sampled from the joint posterior density by sampling from their respective conditional posteriors using Gibbs sampling and Metropolis-Hastings. Monte Carlo simulations demonstrate that the proposed estimation approach is effective in identifying and dating structural breaks. Applied to daily S&P 500 data, one finds strong evidence of three structural breaks. The evidence of these breaks is robust to different specifications including a GARCH specification for the conditional variance of volatility.

Keywords: Long memory; Structural breaks; Change-points; Gibbs sampling (search for similar items in EconPapers)
JEL-codes: C11 C22 C52 G10 (search for similar items in EconPapers)
Pages: 26
Date: 2013
New Economics Papers: this item is included in nep-ecm and nep-ets
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2013-26

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