Impact Of Structural Shifts on Variance Persistence in Asymmetric Garch Models: Evidence From Emerging Asian and European Markets

• Main Authors: Altaf Muhammad, Zhang Shuguang
• Format: Article
• Language: English
• Published: Romanian National Institute of Statistics 2015-03-01
• Series: Revista Română de Statistică
• Subjects: Asymmetric GARCH; Leverage Effect; Shock life; Structural Break Points; Variance Persistency
• Online Access: http://www.revistadestatistica.ro/wp-content/uploads/2015/04/A4_RRS_01_2015.pdf
• ISSN: 1018-046X; 1844-7694

In this study we examined the effect of structural break points in conditional volatility on variance persistency of asymmetric GARCH models. We used Bai and Perron methodology to detect structural break points in conditional variance of daily stock returns of 7 emerging markets (4-European and 3-Asian) from 1997 to 2014. We implied Exponential GARCH or EGARCH and Threshold GARCH or T-GARCH models with and without sudden structural breaks and tried to evaluate persistency in variance and leverage effect while estimating conditional volatility. We concluded that persistence in variance reduces while considering regime shifts in conditional volatility of these models. The half-lives of shock to volatility significantly decline when we consider these sudden break points. Moreover by comparing these two models we concluded that T-GARCH model reduces persistency more gladly than EGARCH model when we account these sudden changes.