Measuring and Testing the Impact of News on Volatility
Robert F. Engle
New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
Victor K. Ng
International Monetary Fund (IMF) - Research Department; National Bureau of Economic Research (NBER)
NBER Working Paper No. w3681
This paper introduces the News Impact Curve to measure how new information is incorporated into volatility estimates. A variety of new and existing ARCH models are compared and estimated with daily Japanese stock return data to determine the shape of the News Impact Curve. New diagnostic tests are presented which emphasize the asymmetry of the volatility response to news. A partially non-parametric ARCH model is introduced to allow the data to estimate this shape. A comparison of this model with the existing models suggests that the best models are one by Glosten Jaganathan and Runkle (GJR) and Nelson's EGARCE. Similar results hold on a pre-crash sample period but are less strong.
Number of Pages in PDF File: 32working papers series
Date posted: June 18, 2004
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