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Journal of Financial Econometrics Advance Access originally published online on May 8, 2008
Journal of Financial Econometrics 2008 6(3):326-360; doi:10.1093/jjfinec/nbn006
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© The Author 2008. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

Are There Structural Breaks in Realized Volatility?

Chun Liu
     School of Economics, and Management, Tsinghua University

John M. Maheu
     Department of Economics, University of Toronto, and RCEA

Address correspondence to J. Maheu, 100 St George Street, Department of Economics, University of Toronto, Toronto, Ontario M5S 3G3, Canada. Tel.: 905-828-5375; e-mail: jmaheu{at}chass.utoronto.ca.

JEL Classification: C22, C11, G10


  Abstract

Constructed from high-frequency data, realized volatility (RV) provides an accurate estimate of the unobserved volatility of financial markets. This paper uses a Bayesian approach to investigate the evidence for structural breaks in reduced form time-series models of RV. We focus on the popular heterogeneous autoregressive (HAR) models of the logarithm of realized volatility. Using Monte Carlo simulations we demonstrate that our estimation approach is effective in identifying and dating structural breaks. Applied to daily S, and P 500 data from 1993-2004, we find strong evidence of a structural break in early 1997. The main effect of the break is a reduction in the variance of log-volatility. The evidence of a break is robust to different models including a GARCH specification for the conditional variance of log(RV).

KEYWORDS: change point, GARCH, Gibbs sampling, marginal likelihood, realized volatility

We thank the Co-Editor Eric Ghysels, an associate editor, and two anonymous referees for many constructive suggestions. We also thank Gordon Anderson, Gael Martin, Alex Maynard, Angelo Melino, and Tom McCurdy for helpful comments. Maheu is grateful for funding from SSHRC.

Received January 24, 2007; revised December 14, 2007; accepted April 1, 2008


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