Structural break tests and the Greek sovereign debt crisis: revisited

Abstract

Amidst the lack of consensus from previous academic studies, this paper contributes to existing literature by further examining the commencement date of the Sovereign Debt Crisis for the Greek economy. The contribution of this paper purports that the contentious issue of the start of the Greek crisis was taking place much earlier than reported by previous research. Empirical results from this paper challenge earlier studies that may have underestimated the impact of the degree of persistence in the volatility of bond returns. This analysis uses monthly 10-year Greek government bond data and three independent structural break model tests which allow for the detection of possible endogenous break dates to capture the beginning of the crisis. Each model provides empirically plausible and robust frameworks for examining the volatility of bond returns in an evolving time series behaviour. Ultimate results from a series of autoregressive EGARCH estimations, with and without dummy variables for break dates are compared. The dummy variables are incorporated within the coefficients of the mean and variance equations to validate the structural breaks in each series. Overall results show a significant presence of nonconsistent parameters capturing a structural break in the time series sample. The detection of this break, November 2009, represents a major regime change triggered by the start of the debt crisis for the Greek economy. Crucially, research implications of such excess volatilities in sovereign bond markets have poignant implications for regulators, investors and portfolio risk managers alike.