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Level changes in volatility models

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Abstract

Level shifts confound the estimation of persistence. This paper shows analytically, in simulations, and using high-frequency stock price data that models for financial volatility that feature a separate source of randomness in the volatility equation are less susceptible to this effect. Such models include recently proposed time series models for realized volatility, as opposed to GARCH models for daily observations, which are highly sensitive to unknown shifts, as has been shown before.

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Authors and Affiliations

  1. Department of Economics and Finance, University of Central Missouri, 307G Dockery, Warrensburg, MO, 64093, USA

    Mihaela Craioveanu

  2. Department of Economics, Louisiana State University, 2126 Patrick F. Taylor Hall, Baton Rouge, LA, 70803, USA

    Eric Hillebrand

Authors
  1. Mihaela Craioveanu
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  2. Eric Hillebrand
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Correspondence to Eric Hillebrand.

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Craioveanu, M., Hillebrand, E. Level changes in volatility models. Ann Finance 8, 277–308 (2012). https://doi.org/10.1007/s10436-010-0163-5

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  • DOI: https://doi.org/10.1007/s10436-010-0163-5

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