Stock Market Volatility and Structural Breaks: An Empirical Analysis of Fragile Five Countries Using GARCH and EGARCH Models

Abstract

This study aims to investigate the potential effects of structural breaks on volatility permanence and asymmetry in stock exchanges of fragile five countries. The study covers the stock market index of 12 countries that were evaluated as fragile fives by various investment institutions on different dates between January 2013 and November 2019. The GARCH and EGARCH models are used for volatility estimates, and ICSS iteration algorithm is used to detect sfructural breaks. Results of the study reveals that among the 12 stock exchanges Indonesia, India, Brazil, Russia and Turkey are the top five countries with persistent volatility in their stock market indices. According to the empirical results from the study, volatility models in which sfructural breaks were not included depicts that the permanence effect is high in Indonesia and India, however, it is relatively lower in Argentina and Egypt. In addition, asymmetric volatility and leverage effect was observed in all country indices except Argentina. While where the response to negative shocks are strongest the indices ofPakistan, Qatar, South Africa and India, the response in Russia is lower. No structural breaks were observed in South Africa, Mexico, Argentina and Qatar exchanges during the period considered in study. In addition, it wasfound that using sfructural breaks in volatility estimates increased the predictive performance of the models.