Greek sovereign bond index, volatility, and structural breaks

Abstract

This article investigates volatility changes in the 10-year Greek sovereign bond index returns using the multiple structural break test developed by Bai and Perron (Econometrica 66:47–78, 1998, J Appl Econ 18:1–22, 2003), which allows for endogenous identification of break dates. We find that there exists one break date in volatility, April 2010, when the European debt crisis worsened and the Greek sovereign bond was downgraded to junk status. We also obtain evidence of performance improvement in our modeling by including structural break dummies into the variance equation. We observe sharp drops in a measure of volatility persistence after incorporating the structural change. Our findings are important for not only investors who assess the volatility of sovereign bonds for portfolio risk management, but also for policy makers who wish to understand and minimize the impacts of excess volatility on the financial system in government bond markets.