Research Repository

CUSUM-Based Monitoring for Explosive Episodes in Financial Data in the Presence of Time-Varying Volatility

Astill, Sam and Harvey, David I and Leybourne, Stephen J and Taylor, AM Robert and Zu, Yang (2021) 'CUSUM-Based Monitoring for Explosive Episodes in Financial Data in the Presence of Time-Varying Volatility.' Journal of Financial Econometrics. ISSN 1479-8409 (In Press)

[img] Text
cusum.pdf - Accepted Version
Restricted to Repository staff only until 1 January 2100.

Download (944kB) | Request a copy

Abstract

We generalise the Homm and Breitung (2012) CUSUM-based procedure for the real-time detection of explosive autoregressive episodes in financial price data to allow for time-varying volatility. Such behaviour can heavily in ate the false positive rate [FPR] of the CUSUM based procedure to spuriously signal the presence of an explosive episode. Our modified procedure involves replacing the standard variance estimate in the CUSUM statistics with a nonparametric kernel-based spot variance estimate. We show that the sequence of modified CUSUM statistics has a joint limiting null distribution which is invariant to any time-varying volatility present in the innovations and that this delivers a real-time monitoring procedure whose theoretical FPR is controlled. Simulations show that the modification is effective in controlling the empirical FPR of the procedure, yet sacrifices only a small amount of power to detect explosive episodes, relative to the standard procedure, when the shocks are homoskedastic. An empirical illustration using Bitcoin price data is provided.

Item Type: Article
Uncontrolled Keywords: Rational bubble; explosive autoregression; CUSUM; real-time monitoring; nonparametric spot volatility estimator
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 16 Mar 2021 13:21
Last Modified: 16 Mar 2021 13:21
URI: http://repository.essex.ac.uk/id/eprint/30046

Actions (login required)

View Item View Item