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Applied Economics Letters Volume 13, 2006 - Issue 7
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Original Articles

Modelling the structural break in volatility

Konstantin A. Kholodilin DIW Berlin, Koenigin-Luise-Strasse 5, 14195 Berlin, Germany
&
Vincent Wenxiong Yao IEA, University of Arkansas at Little Rock, Little Rock, AR 72204, USACorrespondence[email protected]
Pages 417-422 | Published online: 22 Aug 2006
 
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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, Citation2002). 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.

Notes

1 The test statistic is equal 24.8 against a critical value of = 3.84.

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