European Financial and Accounting Journal
European Financial and Accounting Journal
European Financial and Accounting Journal
Faculty of Finance and Accounting, University of Economics, Prague

European Financial and Accounting Journal 2016/3

Structural Distress Index: Structural Break Analysis of the Czech and Polish Stock Markets

DOI: https://doi.org/10.18267/j.efaj.167

[full text (PDF)]

Michael Princ

The estimation of multiple structural break models is usually associated with identification of spurious break points, which are identified by universal algorithms. This leads to overvaluation of structural distress in financial markets represented by data series. The paper is focused on an estimation of the new index, which incorporates results of Student, Bartlett, GLR, Mann-Whitney, Mood, Lepage, Kolmogorov-Smirnov and finally Cramer-von-Mises tests statistics together. The new measure is named Structural Distress Index and evaluates a probability of structural break occurrence based on estimations of proposed models. SDI values show that Czech and Polish stock markets went through more instable period in 1990s than at the beginning of the global financial crisis in 2007. SDI measure is straightforward and can be easily explained, the highest values of SDI can identify the most important break points of the research period, which starts in year 1993 and ends in year 2014. Universality of SDI offers its further extension and application to further research of financial markets.

Keywords: Aggregation, Central Europe, Stability, Stock markets, Structural break analysis

JEL Classification: C13, C51, G14, G15

References:

Anderson, T. W., 1962. On the distribution of the two sample Cramer-von Mises Criterion. Annals of Mathematical Statistics 3, 1148-1159. DOI: 10.1214/aoms/1177704477.

Andreou, E., Ghysels E., 2002. Detecting Multiple Breaks in Financial Market Volatility Dynamics. Journal of Applied Econometrics 5, 579-600. DOI: 10.1002/jae.684.

Andrews, D. W. K., 1993. Tests for parameter instability and structural change with unknown changepoint. Econometrica 4, 821-856. DOI: 10.2307/2951764.

Andrews, D. W. K., Ploberger W., 1994. Optimal tests when a nuisance parameter is present only under the alternative. Econometrica 6, 1383-1414. DOI: 10.2307/2951753.

Brown, R. L., Durbin, J., Evans, J. M., 1975. Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society B 2, 149-163. DOI: 10.2307/2984889.

Chow, G. C., 1960. Tests of equality between sets of coefficients in two linear regressions. Econometrica 3, 591-605. DOI: 10.2307/1910133.

Feller, W. E., 1948. On the Kolmogorov-Smirnov Limit Theorems for Empirical Distributions. The Annals of Mathematical Statistics 2, 301-302. DOI: 10.1214/aoms/1177730243.

Hansen, B. E. 1992. Testing for parameter instability in linear models. Journal of Policy Modeling 4, 517-533. DOI: 10.1016/0161-8938(92)90019-9.

Harvey, D. I., Leybourne, S. J., Newbold, P., 2001. Innovational outlier unit root tests with an endogeneously determined break in level. Oxford Bulletin of Economics and Statistics 5, 559-575. DOI: 10.1111/1468-0084.00235.

Hawkins, D., Qiu, P., Kang, C., 2003. The Changepoint Model for Statistical Process Control. Journal of Quality Technology 4, 355-366.

Hawkins, D., Zamba, K., 2005. Statistical Process Control for Shifts in Mean or Variance Using a Changepoint Formulation. Technometrics 2, 164-173. DOI: 10.1198/004017004000000644.

Hjort, N. L., Koning, A., 2002. Tests for Constancy of Model Parameters Over Time. Nonparametric Statistics 1-2, 113-132. DOI: 10.1080/10485250211394.

Kuan, C. M, Hornik. K., 1995. The generalized fluctuation test: A unifying view. Econometric Reviews 2, 135-161. DOI: 10.1080/07474939508800311.

Lepage, Y., 1971. Combination of Wilcoxians and Ansari–Bradley Statistics. Biometrika 1, 213-217. DOI: 10.2307/2334333.

Mann, H. B., Whitney, D. R., 1947. On a Test of Whether one of Two Random Variables is Stochastically Larger than the Other. Annals of Mathematical Statistics 1, 50-60. DOI: 10.1214/aoms/1177730491.

Mood, A. M., 1954. On the Asymptotic Efficiency of Certain Nonparametric Two-Sample Tests. The Annals of Mathematical Statistics 3, 514-522. DOI: 10.1214/aoms/1177728719.

Muggeo, V. M. R., 2003. Estimating Regression Models with Unknown Break-Points. Statistics in Medicine 19, 3055-3071. DOI: 10.1002/sim.1545.

Page, E. S., 1954. Continuous Inspection Scheme. Biometrika 1/2, 100-115. DOI: 10.1093/biomet/41.1-2.100.

Perron, P., 1997. Further Evidence on Breaking Trend Functions in Macroeconomic Variable. Journal of Econometrics 2, 355-385. DOI: 10.1016/s0304-4076(97)00049-3.

Piehl, A. M., Cooper, S. J., Braga, A. A., Kennedy, D. M., 2003. Testing for Structural Breaks in the Evaluation of Programs. Review of Economics and Statistics 3, 550-558. DOI: 10.1162/003465303322369713.

Ploberger, W., Kramer, W., 1992. The CUSUM test with OLS residuals. Econometrica 2, 271-285. DOI: 10.2307/2951597.

Princ, M., 2014. Testing Gaussian and Non-Gaussian Break Point Models: V4 Stock Markets, Optimization, Education and Data Mining in Science. Engineering and Risk Management Working Papers vol. 8.

Ross, G. J., Adams, N. M., 2012. Two Nonparametric Control Charts for Detecting Arbitary Distribution Changes. Journal of Quality Technology 2, 102-116.

Ross, G. J., Tasoulis, D. K., Adams, N. M., 2011. Nonparametric Monitoring of Data Streams for Changes in Location and Scale. Technometrics 4, 379-389. DOI: 10.1198/TECH.2011.10069.

Snedecor, G. W., Cochran, W. G., 1989. Statistical Methods. Iowa State University Press.

Stock, J. H., Watson, M. W., 1996. Evidence on Structural Instability in Macroeconomic Time Series Relations. Journal of Business & Economic Statistics 1, 11-30. DOI: 10.2307/1392096.

Wald, A., 1945. Sequential Tests of Statistical Hypotheses. Annals of Mathematical Statistics 2, 117-186. DOI: 10.1214/aoms/1177731118.

Wang, Z., Bovik, A. C., Sheikh, H. R., Simoncelli, E. P., 2004. Image quality assessment: From error visibility to structural similarity. IEEE Transactions on Image Processing 4, 600-612. DOI: 10.1109/tip.2003.819861.

Zivot, E., Andrews, D. W. K., 1992. Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis. Journal of Business & Economic Statistics 3, 251-270. DOI: 10.1080/07350015.1992.10509904.