Abstract
This paper presents a new stochastic volatility model which allows for persistent shifts in volatility of stock market returns, referred to as structural breaks. These shifts are endogenously driven by large return shocks (innovations), reflecting large pieces of market news. These shocks are identified from the data as being bigger than the values of two threshold parameters of the model: one for the negative shocks and one for the positive shocks. The model can be employed to investigate economic (or market) sources of volatility shifts, without relying on exogenous information from the sample. In addition to this, it has a number of interesting features which enables us to study the dynamic or changing in magnitude effects of large return shocks on future levels of market volatility. The above properties of the model are shown based on a study for the US stock market volatility. For this market, the model identifies from the data as large negative return shocks these which are smaller than -2.05% on weekly basis, while as large positive return shocks those which are bigger than 2.33%.
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