Structural Breaks in Realized Volatility : A Cautionary Tale

Autoregressive models such as the heterogeneous autoregressive (HAR) model capture the linear footprint inherent in realized volatility. We cast the problem of estimating structural breaks in the autoregressive volatility dynamics as a model selection problem. Interestingly, we find the number of breaks to be heavily influenced by Box-Cox transformations applied to realized volatility series of eight stock market indices: For example, while we find breaks in the original series, no breaks are found in log-realized volatility, a measure often used in applied research. These transformations change the autoregressive dynamics of the series and thus affect the detection of structural breaks