Abstract

http://ssrn.com/abstract=2296898
 
 

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Bad Environments, Good Environments: A Non-Gaussian Asymmetric Volatility Model


Geert Bekaert


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Eric Engstrom


U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets

Andrey Ermolov


Columbia Business School - Finance and Economics

April 10, 2014


Abstract:     
We propose an extension of standard asymmetric volatility models in the generalized autoregressive conditional heteroskedasticity (GARCH) class that admits conditional non-Gaussianities in a tractable fashion. Our "bad environment-good environment" (BEGE) model utilizes two gamma-distributed shocks and generates a conditional shock distribution with time-varying heteroskedasticity, skewness, and kurtosis. The BEGE model features nontrivial news impact curves and closed-form solutions for higher-order moments. In an empirical application to stock returns, the BEGE model outperforms standard asymmetric GARCH and regime-switching models along several dimensions.

Number of Pages in PDF File: 58

Keywords: GARCH, non-Gaussian, risk management, asymmetric volatility, heteroskedasticity, skewness, kurtosis, stock returns

JEL Classification: G1, G11, G12, G17, C5, C580

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Date posted: July 23, 2013 ; Last revised: April 22, 2014

Suggested Citation

Bekaert, Geert and Engstrom, Eric and Ermolov, Andrey, Bad Environments, Good Environments: A Non-Gaussian Asymmetric Volatility Model (April 10, 2014). Available at SSRN: http://ssrn.com/abstract=2296898 or http://dx.doi.org/10.2139/ssrn.2296898

Contact Information

Geert Bekaert
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Eric C. Engstrom (Contact Author)
U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets ( email )
20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3044 (Phone)
Andrey Ermolov
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States
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