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Testing for covariance stationarity of stock returns in the presence of structural breaks: an intervention analysis

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  • Ada Ho
  • Alan Wan

Abstract

This paper investigates whether the stock return series of Australia, Hong Kong, Singapore and the US are covariance stationary using Omran and McKenzie's (The Statistician, 48, 361-69, 1999) testing procedure which comprises the Loretan and Phillips (1994) test and an intervention analysis. The main objective of the procedure is to ascertain the role of structural breaks on the stochastic properties of the stock return series. It is found that the intervention due to the 1997 Asian financial crisis is significant in the case of Hong Kong and Singapore, for which the hypothesis of covariance stationarity cannot be rejected after the effects of the financial crisis have been properly filtered. On the other hand, the evidence suggests that neither the Asian crisis nor the 1998 currency crisis of Russia and Latin America has any significant impact on the stock return series of Australia and the US, which are found to be covariance stationary and covariance nonstationary, respectively.

Suggested Citation

  • Ada Ho & Alan Wan, 2002. "Testing for covariance stationarity of stock returns in the presence of structural breaks: an intervention analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 9(7), pages 441-447.
    • Handle: RePEc:taf:apeclt:v:9:y:2002:i:7:p:441-447
    DOI: 10.1080/13504850110090210
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    Cited by:

    1. Sonia Benito Muela & Mª Ángeles Navarro, 2018. "Assessing the importance of the choice threshold in quantifying market risk under the POT method (EVT)," Documentos de Trabajo del ICAE 2018-20, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    2. Shih-Jui Yang & Ai-Chi Hsu & Show-Yen Lai & Chien-Chiang Lee, 2015. "Empirical Investigation of Herding Behavior in East Asian Stock Markets Toward the U.S. Market," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(1), pages 19-32.
    3. Sonia Benito & Carmen López-Martín & Mª Ángeles Navarro, 2023. "Assessing the importance of the choice threshold in quantifying market risk under the POT approach (EVT)," Risk Management, Palgrave Macmillan, vol. 25(1), pages 1-31, March.
    4. Mahua Barari & Nityananda Sarkar & Srikanta Kundu & Kushal Banik Chowdhury, 2014. "Forecasting House Prices in the United States with Multiple Structural Breaks," International Econometric Review (IER), Econometric Research Association, vol. 6(1), pages 1-23, April.
    5. Bátiz-Zuk, Enrique & Lara-Sánchez, José Luis, 2022. "Measuring the evolution of competition and the impact of the financial reform in the Mexican banking sector, 2008–2019," Research in International Business and Finance, Elsevier, vol. 59(C).
    6. Andrew Worthington & Abbas Valadkhani, 2004. "Measuring the impact of natural disasters on capital markets: an empirical application using intervention analysis," Applied Economics, Taylor & Francis Journals, vol. 36(19), pages 2177-2186.
    7. Abbas Valadkhani, 2005. "Goods and Services Tax Effects on Goods and Services Included in the Consumer Price Index Basket," The Economic Record, The Economic Society of Australia, vol. 81(s1), pages 104-114, August.
    8. Josep Lluís Carrion-i-Silvestre & Andreu Sansó, 2023. "“Generalized Extreme Value Approximation to the CUMSUMQ Test for Constant Unconditional Variance in Heavy-Tailed Time Series”," AQR Working Papers 202305, University of Barcelona, Regional Quantitative Analysis Group, revised Jul 2023.
    9. Valadkhani, Abbas, 2005. "Pre- and Post-Dynamic GST Effects on Goods and Services Included in the CPI Basket," Economics Working Papers wp05-08, School of Economics, University of Wollongong, NSW, Australia.
    10. Andrew Worthington & Abbas Valadkhani, 2005. "Catastrophic Shocks and Capital Markets: A Comparative Analysis by Disaster and Sector," Global Economic Review, Taylor & Francis Journals, vol. 34(3), pages 331-344.
    11. Jaime Pinilla & Miguel Negrín, 2021. "Non-Parametric Generalized Additive Models as a Tool for Evaluating Policy Interventions," Mathematics, MDPI, vol. 9(4), pages 1-12, February.
    12. Guo, Yingwen & Zhou Z.F., Sherry, 2011. "Duration Analysis of Interest Rate Spells : Cross-National Study of Interest Rate Policy," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 52(1), pages 1-11, June.

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