The Influence of Structural Changes in Volatility on Shock Transmission and Volatility Spillover among Iranian Gold and Foreign Exchange Markets

Mohammad Mahdi Shahrazi (), Zahra (Mila) Elmi, Esmaiel Abounoori and Saeed Rasekhi
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Mohammad Mahdi Shahrazi: Department of Economics, University of Mazandaran, Babolsar, Iran.
Zahra (Mila) Elmi: Department of Economics, University of Mazandaran, Babolsar, Iran.
Saeed Rasekhi: Department of Economics, University of Mazandaran, Babolsar, Iran.

Iranian Economic Review (IER), 2014, vol. 18, issue 2, 73-86

Abstract: The increasing integration of financial markets has generated strong interest in understanding the interaction between these markets. The direction of shock transmission and volatility Spillover from one market to another may affect by structural changes in volatility. However, a shortcoming of traditional GARCH models is that ignore these structural changes. This study investigates the effect of structural changes in volatility on shock transmission and volatility Spillover among Iranian gold and foreign exchange markets during 2007-2013. For this purpose, first we detect the time points of structural breaks in volatility of gold and exchange rate returns endogenously using the modified iterated cumulative sums of squares algorithm. Then, we incorporate this information to modeling volatility process. The results of applying bivariate GARCH model in off-diagonal BEKK parameterization suggest that volatility spillover among Iranian gold and foreign exchange markets is bidirectional but shock transmission is unidirectional from the gold market to the foreign exchange market. Based on findings, ignoring structural breaks in volatility mislead the researcher about the dynamics of shocks and volatilities among these two important markets.

Keywords: Structural Changes; Volatility; Shock Transmission; Spillover Effect; Modified ICSS Algorithm; GARCH Process. (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eut:journl:v:18:y:2014:i:2:p:73

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