How Are Structural Breaks Related to Stock Return Volatility Persistence? Evidence from China and Japan

Abstract

This study empirically examines the effects of structural breaks on equity return volatility persistence by using Chinese and Japanese equity index return data. Applying standard GARCH models and two kinds of structural break dummy variables, we derive the following findings. First, we reveal that for both Chinese and Japanese equity index returns, the values of GARCH parameters of standard GARCH models decline when the first structural break dummies are incorporated. Second, our analyses further clarify that for both Chinese and Japanese equity index returns, the values of GARCH parameters of standard GARCH models again decline when different kinds of structural break dummies are incorporated.