Do structural breaks in volatility cause spurious volatility transmission?

Massimiliano Caporin and Farooq Malik

Journal of Empirical Finance, 2020, vol. 55, issue C, 60-82

Abstract: We show through extensive Monte Carlo simulations that structural breaks in volatility (volatility shifts) across two independently generated return series cause spurious volatility transmission when estimated with popular bivariate GARCH models. However, using a dummy variable for the induced volatility shift virtually eliminates this bias. We also show that structural breaks in volatility have a substantial impact on the estimated hedge ratios. We confirm our simulation findings using the US stock market data.

Keywords: Volatility; Structural breaks; GARCH (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:55:y:2020:i:c:p:60-82

DOI: 10.1016/j.jempfin.2019.11.002

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