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.
|Original language||English (US)|
|Number of pages||23|
|Journal||Journal of Empirical Finance|
|State||Published - Jan 2020|
- Structural breaks
ASJC Scopus subject areas
- Economics and Econometrics