Sparse Change-point HAR Models for Realized Variance

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02 Décembre 2016
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Arnaud Dufays
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Enjeux économiques et financiers
Realized variance
Bayesian inference
Time series
Shrinkage prior
Change-point model
Online forecasting
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Change-point time series specifications constitute flexible models that capture unknown structural changes by allowing for switches in the model parameters. Nevertheless most models suffer from an over-parametrization issue since typically only one latent state variable drives the switches in all parameters. This implies that all parameters have to change when a break happens. To gauge whether and where there are structural breaks in realized variance, we introduce the sparse change-point HAR model. The approach controls for model parsimony by limiting the number of parameters which evolve from one regime to another. Sparsity is achieved thanks to employing a nonstandard shrinkage prior distribution. We derive a Gibbs sampler for inferring the parameters of this process. Simulation studies illustrate the excellent performance of the sampler. Relying on this new framework, we study the stability of the HAR model using realized variance series of several major international indices between January 2000 and August 2015.


Arnaud Dufays: Université Laval
Jeroen V.K. Rombouts : ESSEC Business School, Av. B. Hirsch, Cergy Pontoise,