Bad Environments, Good Environments: A Non-Gaussian Asymmetric Volatility Model

58 Pages Posted: 23 Jul 2013 Last revised: 8 Feb 2016

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Eric Engstrom

U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets

Andrey Ermolov

Fordham University - Gabelli School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: April 10, 2014

Abstract

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

Suggested Citation

Bekaert, Geert and Engstrom, Eric C. and Ermolov, Andrey, Bad Environments, Good Environments: A Non-Gaussian Asymmetric Volatility Model (April 10, 2014). Available at SSRN: https://ssrn.com/abstract=2296898 or http://dx.doi.org/10.2139/ssrn.2296898

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Eric C. Engstrom (Contact Author)

U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3044 (Phone)

Andrey Ermolov

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States
9179690060 (Phone)

HOME PAGE: http://faculty.fordham.edu/aermolov1/

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