Bad Environments, Good Environments: A Non-Gaussian Asymmetric Volatility Model
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets
Columbia Business School - Finance and Economics
April 10, 2014
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, C580working papers series
Date posted: July 23, 2013 ; Last revised: April 22, 2014
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