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Volatility spillover among sector equity returns under structural breaks

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  • Farooq Malik

    (Northern Arizona University)

Abstract

Recent evidence suggests that ignoring structural breaks in volatility in financial asset returns can result in overestimation of volatility spillover among markets. This paper examines volatility spillover among major US equity sectors (i.e. Financial, Technology, Energy, Health, Consumer and Industrial) with bivariate GARCH models utilizing daily data from April 2006 to March 2021 after adjusting for volatility breaks. I find significantly less volatility spillover between sector returns after adjusting for detected volatility breaks into a bivariate GARCH model. I also show that after adding volatility breaks into a model the estimated hedge ratios change significantly and show considerably less variability over time, which can result in substantial savings in portfolio rebalancing costs.

Suggested Citation

  • Farooq Malik, 2022. "Volatility spillover among sector equity returns under structural breaks," Review of Quantitative Finance and Accounting, Springer, vol. 58(3), pages 1063-1080, April.
    • Handle: RePEc:kap:rqfnac:v:58:y:2022:i:3:d:10.1007_s11156-021-01018-8
    DOI: 10.1007/s11156-021-01018-8
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    Cited by:

    1. Tam Hoang-Nhat Dang & Nhan Thien Nguyen & Duc Hong Vo, 2023. "Sectoral volatility spillovers and their determinants in Vietnam," Economic Change and Restructuring, Springer, vol. 56(1), pages 681-700, February.

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    More about this item

    Keywords

    Volatility spillover; Equity volatility; Structural breaks; GARCH;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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