General Auto-Regressive Asset Model

40 Pages Posted: 2 Jul 2009 Last revised: 7 Jan 2010

See all articles by Jiaxin Wang

Jiaxin Wang

affiliation not provided to SSRN

Andrea Petrelli

Credit Suisse Securities

Ram Balachandran

affiliation not provided to SSRN

Olivia Siu

affiliation not provided to SSRN

Jun Zhang

affiliation not provided to SSRN

Rupak Chatterjee

Stevens Institute of Technology

Vivek Kapoor

affiliation not provided to SSRN

Date Written: July 1, 2009

Abstract

Equity returns are addressed by a new General Auto-Regressive Asset Model (GARAM). In this model, two stochastic processes are employed to represent the return magnitude and return sign. Empirical auto-covariance and cross-covariance functions of the return magnitude and return sign are key model inputs, and result in a realistic structure of the clustering of volatility, dynamic asymmetry (leverage-effect), and the associated fat-tails. The term-dependence of the asset return density, including the slow decay of kurtosis and the buildup and slow decay of skewness are encompassed by GARAM. The resulting framework for unconditional and conditional Monte-Carlo simulation of asset returns is illustrated.

Keywords: asymmetry, skewness, leverage-effect, kurtosis, filtering, conditional simulation, financial time-series

JEL Classification: G11, D81

Suggested Citation

Wang, Jiaxin and Petrelli, Andrea and Balachandran, Ram and Siu, Olivia and Zhang, Jun and Chatterjee, Rupak and Kapoor, Vivek, General Auto-Regressive Asset Model (July 1, 2009). Available at SSRN: https://ssrn.com/abstract=1428555 or http://dx.doi.org/10.2139/ssrn.1428555

Jiaxin Wang

affiliation not provided to SSRN ( email )

Andrea Petrelli

Credit Suisse Securities ( email )

One Cabot Square
London, E14 4QJ
United Kingdom

Ram Balachandran

affiliation not provided to SSRN

Olivia Siu

affiliation not provided to SSRN ( email )

Jun Zhang

affiliation not provided to SSRN ( email )

Rupak Chatterjee

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

Vivek Kapoor (Contact Author)

affiliation not provided to SSRN ( email )

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