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Bootstrapping Non-Stationary Stochastic Volatility

H. Peter Boswijk, Giuseppe Cavaliere (), Anders Rahbek and Iliyan Georgiev

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Abstract: In this paper we investigate how the bootstrap can be applied to time series regressions when the volatility of the innovations is random and non-stationary. The volatility of many economic and financial time series displays persistent changes and possible non-stationarity. However, the theory of the bootstrap for such models has focused on deterministic changes of the unconditional variance and little is known about the performance and the validity of the bootstrap when the volatility is driven by a non-stationary stochastic process. This includes near-integrated volatility processes as well as near-integrated GARCH processes. This paper develops conditions for bootstrap validity in time series regressions with non-stationary, stochastic volatility. We show that in such cases the distribution of bootstrap statistics (conditional on the data) is random in the limit. Consequently, the conventional approaches to proving bootstrap validity, involving weak convergence in probability of the bootstrap statistic, fail to deliver the required results. Instead, we use the concept of `weak convergence in distribution' to develop and establish novel conditions for validity of the wild bootstrap, conditional on the volatility process. We apply our results to several testing problems in the presence of non-stationary stochastic volatility, including testing in a location model, testing for structural change and testing for an autoregressive unit root. Sufficient conditions for bootstrap validity include the absence of statistical leverage effects, i.e., correlation between the error process and its future conditional variance. The results are illustrated using Monte Carlo simulations, which indicate that the wild bootstrap leads to size control even in small samples.

Date: 2021-01
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Journal Article: Bootstrapping non-stationary stochastic volatility (2021) Downloads
Working Paper: Bootstrapping Non-Stationary Stochastic Volatility (2019) Downloads
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