Measuring Contemporaneous Correlation between Return Shock and Volatility Shock in an EGARCH Model

28 Pages Posted: 14 Jan 2011

See all articles by Minxian Yang

Minxian Yang

UNSW Australia Business School, School of Economics

Date Written: July 12, 2006

Abstract

GARCH type models, with one disturbance to the return of a financial asset, have not been considered as a framework for measuring the contemporaneous correlation between the return shock and the volatility shock. We show that the contemporaneous correlation can be quantified within an EGARCH model, where the composite disturbance to the return follows a normal log-normal mixture distribution that accommodates skewness and excess kurtosis. The strict stationarity and covariance stationarity of the proposed model are analyzed. The estimation of the model with the SP500 excess return series lends a mild support for the contemporaneous correlation being negative and the ARCH-M effect being positive.

Keywords: GARCH, stochastic volatility, ARCH-M, leverage, maximum likelihood

JEL Classification: C22, C51, G12

Suggested Citation

Yang, Minxian, Measuring Contemporaneous Correlation between Return Shock and Volatility Shock in an EGARCH Model (July 12, 2006). Available at SSRN: https://ssrn.com/abstract=1543063 or http://dx.doi.org/10.2139/ssrn.1543063

Minxian Yang (Contact Author)

UNSW Australia Business School, School of Economics ( email )

School of Economics
The University of New South Wales
Sydney, NSW NSW 2052
Australia
93853353 (Phone)

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