A Multivariate Analysis of the Effects of Structural Breaks on Stock Return Volatility Persistence: The Case of the US and Japan

Abstract

This paper quantitatively inspects the effects of structural breaks in stock returns on their volatility persistence by using the stock return data of the US and Japan. More concretely, applying the diagonal BEKK-MGARCH model with and without structural break dummies to the returns of S&P 500 and TOPIX, we reveal the following interesting findings. (1) First, we clarify that for both the US and Japanese stock returns, the values of the GARCH parameters, namely, the values of the volatility persistence parameters in the diagonal BEKK-MGARCH models decrease when we include the structural break dummies in the models. (2) Second, we further find that interestingly, during the Lehman crisis in 2008, the estimated time-varying volatilities from the diagonal BEKK-MGARCH model with structural break dummies are slightly higher than those from the no structural break dummy model. (3) Third, we furthermore reveal that also very interestingly, the estimated time-varying correlations from the diagonal BEKK-MGARCH model with no structural break dummy are slightly higher than those from the structural break dummy model.