Bad Environments, Good Environments: A Non-Gaussian Asymmetric Volatility Model
58 Pages Posted: 23 Jul 2013 Last revised: 8 Feb 2016
Date Written: April 10, 2014
We propose an extension of standard asymmetric volatility models in the generalized autoregressive conditional heteroskedasticity (GARCH) class that admits conditional non-Gaussianities in a tractable fashion. Our "bad environment-good environment" (BEGE) model utilizes two gamma-distributed shocks and generates a conditional shock distribution with time-varying heteroskedasticity, skewness, and kurtosis. The BEGE model features nontrivial news impact curves and closed-form solutions for higher-order moments. In an empirical application to stock returns, the BEGE model outperforms standard asymmetric GARCH and regime-switching models along several dimensions.
Keywords: GARCH, non-Gaussian, risk management, asymmetric volatility, heteroskedasticity, skewness, kurtosis, stock returns
JEL Classification: G1, G11, G12, G17, C5, C580
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