Wavelet-based detection of outliers in volatility models

Helena Veiga

DES - Working Papers. Statistics and Econometrics. WS from Universidad Carlos III de Madrid. Departamento de Estadística

Abstract: Outliers in financial data can lead to model parameter estimation biases, invalid inferences and poor volatility forecasts. Therefore, their detection and correction should be taken seriously when modeling financial data. This paper focuses on these issues and proposes a general detection and correction method based on wavelets that can be applied to a large class of volatility models. The effectiveness of our proposal is tested by an intensive Monte Carlo study for six well known volatility models and compared to alternative proposals in the literature, before applying it to three daily stock market indexes. The Monte Carlo experiments show that our method is both very effective in detecting isolated outliers and outlier patches and much more reliable than other wavelet-based procedures since it detects a significant smaller number of false outliers.

Keywords: Outliers; Outlier; patches; Volatility; models; Wavelets (search for similar items in EconPapers)
JEL-codes: C22 C5 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:cte:wsrepe:ws090403

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