We make three contributions to the volatility impulse response function (VIRF) of Hafner and Herwartz (2006), the most widely applied impulse response function in the context of multivariate volatility models. Firstly, we derive its law in the BEKK model. Secondly, we present a structural embedding of the VIRF by relying on recent developments for identification in MGARCH models. This broadens the use case of the VIRF, to date limited to historical analyses, by allowing for counterfactual and out-of-sample scenario analyses of volatility responses. Thirdly, we show how to endow the VIRF with a causal interpretation. We illustrate the merits of a structural VIRF analysis by investigating the impacts of historical shock events as well as the consequences of well-defined future shock scenarios on the U.S. equity, government bond and foreign exchange market. Our findings suggest that it is vital to be able to assess the statistical significance of volatility impulse responses.
Language
English
Event Title
Quantitative Finance and Financial Econometrics QFFE Conference 2022