ALRIGHT: Asymmetric LaRge-Scale (I)GARCH with Hetero-Tails

Abstract

It is well-known in empirical nance that virtually all asset returns, whether monthly, daily, or intraday, are heavy-tailed and, particularly for stock returns, are mildly but often signicantly negatively skewed. However, the tail indices, or maximally existing moments of the returns, can dier markedly across assets. To accommodate these stylized facts when modeling the joint distribution of asset returns, an asymmetric extension of the metaelliptical t distribution is proposed. While the likelihood is tractable, for high dimensions it will be impractical to use for estimation. To address this, a fast, two-step estimation procedure is developed, based on a saddlepoint approximation to the noncentral Student's t distribution. The model is extended to support a CCC-(I)GARCH structure and demonstrated by modeling and forecasting the return series comprising the DJIA. The techniques of shrinkage, time-varying tail dependence, and weighted likelihood are employed to further enhance the forecasting performance of the model with no added computational burden.

Keywords: Asymmetry, Copula, Density Forecasting, Empirical Finance, Fat Tails, GARCH, Integrated GARCH, Multivariate Distribution, Saddlepoint Approximation, Shrinkage Estimation, Weighted Likelihood

JEL Classification: C13, C32, G11