Farooq Malik

Estimating Volatility Persistence in Oil Prices Under Structural Breaks

Policy makers and financial market participants are interested in knowing how shocks affect the volatility of oil prices over time. We accurately compute the volatility persistence by incorporating endogenously determined structural breaks into a GARCH model. Contrary to previous findings, we find that oil shocks dissipate very quickly but have a strong initial impact. Understanding this behavior is not only important for derivative valuation and hedging decisions but for broader financial markets and the overall economy, for which there are significant consequences.

Estimating the impact of good news on stock market volatility

The literature agrees that bad news increases volatility but disagrees over the impact of good news on stock market volatility and often report it as statistically insignificant. This article shows that accounting for endogenously determined structural breaks within the asymmetric Generalized Autoregressive Conditional Heteroscedastic (GARCH) model reduces volatility persistence and good news significantly decreases volatility. However, good news does not affect volatility if structural breaks are ignored. We validate our empirical results with Monte Carlo simulations and provide an intuitive explanation for our results. Our results resolve earlier inconsistencies in the literature and have important practical implications for building accurate asset pricing models and forecasting of stock market volatility.