Volatility spillover among sector equity returns under structural breaks

Research output: Contribution to journalArticlepeer-review

Abstract

Recent evidence suggests that ignoring structural breaks in volatility in financial asset returns can result in overestimation of volatility spillover among markets. This paper examines volatility spillover among major US equity sectors (i.e. Financial, Technology, Energy, Health, Consumer and Industrial) with bivariate GARCH models utilizing daily data from April 2006 to March 2021 after adjusting for volatility breaks. I find significantly less volatility spillover between sector returns after adjusting for detected volatility breaks into a bivariate GARCH model. I also show that after adding volatility breaks into a model the estimated hedge ratios change significantly and show considerably less variability over time, which can result in substantial savings in portfolio rebalancing costs.

Original languageEnglish (US)
Pages (from-to)1063-1080
Number of pages18
JournalReview of Quantitative Finance and Accounting
Volume58
Issue number3
DOIs
StatePublished - Apr 2022
Externally publishedYes

Keywords

  • Equity volatility
  • GARCH
  • Structural breaks
  • Volatility spillover

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

Fingerprint

Dive into the research topics of 'Volatility spillover among sector equity returns under structural breaks'. Together they form a unique fingerprint.

Cite this