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Volatility Jumps: The Role of Geopolitical Risks

Author

Listed:
  • Konstantinos Gkillas

    (Department of Business Administration , University of Patras, University Campus, Greece)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Mark E. Wohar

    (College of Business Administration, University of Nebraska at Omaha, Omaha, USA and School of Business and Economics, Loughborough University, Leicestershire, UK)

Abstract

In this paper we analyse the role of a news-based index of geopolitical risks (GPRs), in predicting volatility jumps in the Dow Jones Industrial Average (DJIA) over the monthly period of 1899:01 to 2017:12, with the jumps having been computed based on daily data over the same period. Standard linear Granger causality test fail to detect any evidence of GPRs causing volatility jumps. But given strong evidence of nonlinearity and structural breaks between jumps and GPRs, we next employ a nonparametric causality-in-quantiles test, because the linear model is misspecified. Using this data-driven robust approach we were able to detect overwhelming evidence of GPRs predicting volatility jumps in the DJIA over its entire conditional distribution.

Suggested Citation

  • Konstantinos Gkillas & Rangan Gupta & Mark E. Wohar, 2018. "Volatility Jumps: The Role of Geopolitical Risks," Working Papers 201805, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201805
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Stock Market Volatility Jumps; Geopolitical Risks;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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