Modelling the structural break in volatility

Konstantin Kholodilin () and Vincent Yao

Applied Economics Letters, 2006, vol. 13, issue 7, 417-422

Abstract: Recent studies suggest that US and other developed economies have become considerably stabilized in terms of volatility since the mid-1980s (Stock and Watson, 2002). This study models the structural break in volatility using a dynamic factor model with two state variables: one capturing cyclical fluctuations and another reflecting volatility decline. The new model confirms a one-time volatility reduction in the US economy in February 1984. Four-regime models appear to outperform two-regime models.

Date: 2006
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DOI: 10.1080/13504850500398542

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