Selection of a model for exploring cross market linkages: A review of E-GARCH, markov-switching framework and structural break models
Edith Cowan University
School of Business and Law
This article undertakes a literature review on the E-GARCH model, the Markov-switching framework and two structural break tests. Each model addresses different criteria and has different limitations, however, they complement each other nicely. The E-GARCH model deals with serial correlations and heteroskedasticity but implies spuriously high persistence in volatility if structural breaks are not accounted for. The Markov-switching framework can model specific regime cross-market behaviours and address the persistency in volatility effectively when combining with a GARCH model. Unknown structural breaks and impacts of a specific event can be tested using LSTR and SF models.