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Modelling the structural break in volatility

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  • Konstantin Kholodilin
  • Vincent Wenxiong Yao

Abstract

Recent studies suggest that US and other developed economies have become considerably stabilized in terms of volatility since the mid-1980s (Stock and Watson, 2002). This study models the structural break in volatility using a dynamic factor model with two state variables: one capturing cyclical fluctuations and another reflecting volatility decline. The new model confirms a one-time volatility reduction in the US economy in February 1984. Four-regime models appear to outperform two-regime models.

Suggested Citation

  • Konstantin Kholodilin & Vincent Wenxiong Yao, 2006. "Modelling the structural break in volatility," Applied Economics Letters, Taylor & Francis Journals, vol. 13(7), pages 417-422.
    • Handle: RePEc:taf:apeclt:v:13:y:2006:i:7:p:417-422
    DOI: 10.1080/13504850500398542
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    References listed on IDEAS

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    5. Výrost, Tomáš & Baumöhl, Eduard & Lyócsa, Štefan, 2011. "On the relationship of persistence and number of breaks in volatility: new evidence for three CEE countries," MPRA Paper 27927, University Library of Munich, Germany.
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