Testing for Changes in the Unconditional Variance of Financial Time Series

Andreu Sansó, Vicent Aragó and Josep Carrion-i-Silvestre

No 5, DEA Working Papers from Universitat de les Illes Balears, Departament d'Economía Aplicada

Abstract: Inclan and Tiao (1994) proposed a test for the detection of changes of the unconditional variance which has been used in financial time series analysis. In this article we show some serious drawbacks for using this test with this type of data. Specifically, it su.ers important size distortions for leptokurtic and platykurtic innovations. Moreover, the size distortions are more extreme for heteroskedastic conditional variance processes. These results invalidate in practice the use of the test for financial time series. To overcome these problems we propose new tests that explicitly consider the fourth moment properties of the disturbances and the conditional heteroskedasticity. Monte Carlo experiments show the good performance of these tests. The application of the new tests to the same series in Aggarwal, Inclan and Leal (1999) reveal that the changes in variance they detect are spurious.

Keywords: ICSS; Changes in Variance; Kurtosis; ARCH; IGARCH. (search for similar items in EconPapers)
JEL-codes: C12 C22 G19 (search for similar items in EconPapers)
Date: 2003-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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