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
July 22, 2013
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: 46
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
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