Sudden changes in volatility: The case of five central European stock markets

Abstract

This is the post-print version of the final paper published in Journal of International Financial Markets, Institutions and Money. The published article is available from the link below. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. Copyright @ 2007 Elsevier B.V.This paper investigates sudden changes in volatility in the stock markets of new European Union (EU) members by utilizing the iterated cumulative sums of squares (ICSS) algorithm. Using weekly data over the sample period 1994–2006, the time period of sudden change in variance of returns and the length of this variance shift are detected. A sudden change in volatility seems to arise from the evolution of emerging stock markets, exchange rate policy changes and financial crises. Evidence also reveals that when sudden shifts are taken into account in the GARCH models, the persistence of volatility is reduced significantly in every series. It suggests that many previous studies may have overestimated the degree of volatility persistence existing in financial time series