Do structural breaks in volatility cause spurious volatility transmission?

Massimiliano Caporin, Farooq Malik

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)60-82
Number of pages23
JournalJournal of Empirical Finance
Volume55
DOIs
StatePublished - Jan 2020
Externally publishedYes

Keywords

  • GARCH
  • Structural breaks
  • Volatility

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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