The Impact of Structural Break to Permanent and Transitory Components of Malaysian Stock Market

Abstract

This article studied the time-varying volatility, components features of volatility, non-normality and leverage effect of Malaysian stock market under the structural breaks. A modified threshold two-components autoregressive conditional heteroscedasticity (ARCH) model with sudden structural changes is developed to account for all the possible stylized facts simultaneously. Our empirical results have shown that the permanent components are substantially reduced or eliminated when the structural break effects are included in the transitory and permanent components for the conditional variance models separately. With this finding, we concluded that the structural breaks have created the spurious longpersistence volatility in the Malaysian stock market.