Modeling Market Downside Volatility

Review of Finance (2013), 17(1), 443-481, doi: 10.1093/rof/rfr024

52 Pages Posted: 9 Mar 2010 Last revised: 7 Jan 2013

See all articles by Bruno Feunou

Bruno Feunou

Bank of Canada

Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System

Roméo Tédongap

ESSEC Business School

Date Written: March 1, 2011

Abstract

We propose a new methodology for modeling and estimating time-varying downside risk and upside uncertainty in equity returns and for assessment of risk-return trade-off in financial markets. Using the salient features of the binormal distribution, we explicitly relate downside risk and upside uncertainty to conditional heteroscedasticity and asymmetry through binormal GARCH (BiN-GARCH) model. Based on S&P 500 and international index returns, we find strong empirical support for existence of signi cant relative downside risk, and robust positive relationship between relative downside risk and conditional mode.

Keywords: Binormal distribution, Downside risk, Intertemporal CAPM, GARCH, Relative downside volatility, Risk-return trade-off, Upside uncertainty.

JEL Classification: C22, C51, G12, G15

Suggested Citation

Feunou, Bruno and Jahan-Parvar, Mohammad R. and Tédongap, Roméo, Modeling Market Downside Volatility (March 1, 2011). Review of Finance (2013), 17(1), 443-481, doi: 10.1093/rof/rfr024. Available at SSRN: https://ssrn.com/abstract=1567158 or http://dx.doi.org/10.2139/ssrn.1567158

Bruno Feunou

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-8302 (Phone)

HOME PAGE: http://kamkui.net/

Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/site/mrjahan/

Roméo Tédongap (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France
+33134439734 (Phone)
+33134439734 (Fax)

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