Structural Breakpoints in Volatility in International Markets

36 Pages Posted: 7 Aug 2006

Date Written: June 2005

Abstract

In this article, we test for the presence of structural breaks in volatility by two alternative approaches: the Iterative Cumulative Sum of Squares (ICSS) algorithm and wavelet analysis. Specifically, we look at the effect of the outbreak of the Asian crisis and the terrorist attacks of September 11, 2001 on Emerging Asia, Europe, Latin America and North America's stock markets. In addition, we focus on the behavior of interest rates in Chile after the Central Bank switched its monetary policy interest rate from an inflationindexed to a nominal target in August 2001. Our estimation results show that the number of shifts detected by the two methods is substantially reduced when filtering out the data for both conditional heteroskedasticity and serial correlation. In addition, we conclude that the wavelet-based test tends to be more robust.

Keywords: ICSS algorithm, wavelet analysis, volatility breakpoints

JEL Classification: C22, G15

Suggested Citation

Fernandez, Viviana, Structural Breakpoints in Volatility in International Markets (June 2005). IIIS Discussion Paper No. 76, Available at SSRN: https://ssrn.com/abstract=922004 or http://dx.doi.org/10.2139/ssrn.922004

Viviana Fernandez (Contact Author)

Adolfo Ibanez University ( email )

Diagonal Las Torres 2640
PeƱalolen
Santiago, 794-1169
Chile

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