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Statistical Research Unit, Department of Economics, School of Business, Economics and Law, University of Gothenburg Resarch Reports

No 2007:9:
Evaluations of likelihood based surveillance of volatility

David Bock ()

Abstract: The volatility of asset returns are important in finance. Different likelihood based methods of statistical surveillance for detecting a change in the variance are evaluated. The differences are how the partial likelihood ratios are weighted. The full likelihood ratio, Shiryaev-Roberts, Shewhart and the CUSUM methods are derived in case of an independent and identically distributed Gaussian process. The behavior of the methods is studied both when there is no change and when the change occurs at different time points. The false alarms are controlled by the median run length. Differences and limiting equalities of the methods are shown. The performances when the process parameters for which the methods are optimized for differ from the true values of the parameters are evaluated. The methods are illustrated on a period of Standard and Poor’s 500 stock market index.

Keywords: surveillance; statistical process control; monitoring; likelihood ratio; Shewhart; CUSUM; (follow links to similar papers)

JEL-Codes: C10; (follow links to similar papers)

20 pages, January 1, 2007

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