Modeling Volatility of Financial Instruments Taking into Account Possible Structural Breaks: Application to Russian Securities

Volatility is a very important component in many different investment strategies, and is used as a measure of dispersion in return on assets. Thus, it describes the risk associated with the observed financial instrument. But volatility is also a measure that is not generally accepted, especially when considering the calculation in detail. In this paper we consider the approach of volatility analysis, in which the calculation is made taking into account structural shifts (disorderly process), as ignoring the structural shift factor in model evaluation leads to wrong results, incorrect estimates and distorted forecasts. In the first stage of the study, volatility was estimated for the share yield series of Russian telecom operator companies and emerging markets using the GARCH model. At the second stage, structural shifts were detected by testing Nyblom statistics. At the third stage, the TGARCH and GJR GARCH models were used to account for the structural shift. The results showed that during the structural shift (crisis), the standard GARCH model shows lower estimates than models that take into account the structural shift factor.