Abstract

We analyze whether the Asian crisis and the terrorist attacks of September 11 caused permanent volatility shifts in the world stock markets. In doing so, we test for the presence of structural breaks in volatility during 1997-2002 by resorting to the iterative cumulative sum of squares (ICSS) algorithm and wavelet-based variance analysis. We find that the number of shifts detected by the two methods decreases substantially when both correlated volatility and inertia are taken into account. Specifically, the ICSS algorithm fails to find any breakpoints, while a wavelet-based variance test detects breakpoints at the high-frequency components of the filtered data. © 2006 Elsevier B.V. All rights reserved.