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IDENTIFYING REGIME CHANGES IN MARKET VOLATILITY
Author(s) -
Guo Weiyu,
Wohar Mark E.
Publication year - 2006
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2006.00167.x
Subject(s) - volatility (finance) , econometrics , economics , standard deviation , volatility risk premium , volatility swap , volatility smile , implied volatility , casual , forward volatility , financial economics , statistics , mathematics , materials science , composite material
A casual inspection of a graph of volatility indexes over time indicates that volatility has undergone infrequent, but significant, shifts in its average level. The purpose of this article is to test for multiple structural breaks in the mean level of market volatility measured by the VIX and VXO, and to identify statistically the dates of these mean shifts. We find evidence of three distinct periods: pre‐1992, 1992–1997, and post‐1997. We find that the mean volatility, as well as its standard deviation, was lowest during 1992–1997. Our findings provide statistical evidence consistent with popular beliefs that market volatility changes over time.