Friday, 26 February 2021 13:27

Do structural breaks in volatility cause spurious volatility transmission?

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Caporin M

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  • Year: 2020
  • 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.
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Massimiliano Caporin

Professor in Econometrics - University of Padua

GRETA Associate, Scientific Committee and Director of the Area Investment & Financial Advisory