Cross-Sectional Distribution of GARCH Coefficients across S&P 500 Constituents: Time-Variation over the Period 2000-2012

Abstract

We investigate the time-variation of the cross-sectional distribution of asymmetric GARCH model parameters over the S&P 500 constituents for the period 2000-2012. We find the following results. First, the unconditional variances in the GARCH model obviously show major time-variation, with a high level after the dot-com bubble and the highest peak in the latest financial crisis. Second, in these more volatile periods it is especially the persistence of deviations of volatility from its unconditional mean that increases. Particularly in the latest financial crisis, the estimated models tend to Integrated GARCH models, which can cope with an abrupt regime-shift from low to high volatility levels. Third, the leverage effect tends to be somewhat higher in periods with higher volatility. Our findings are mostly robust across sectors, except for the technology sector, which exhibits a substantially higher volatility after the dot-com bubble. Further, the financial sector shows the highest volatility during the latest financial crisis. Finally, in an analysis of different market capitalizations, we find that small cap stocks have a higher volatility than large cap stocks where the discrepancy between small and large cap stocks increased during the latest financial crisis. Small cap stocks also have a larger conditional kurtosis and a higher leverage effect than mid cap and large cap stocks.

Keywords: GARCH, GJR, equity, leverage effect, S&P 500 universe

JEL Classification: C22, C52