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

60 Pages Posted: 16 Aug 2014

See all articles by Geert Bekaert

Geert Bekaert

Columbia University - Columbia Business School, Finance

Eric Engstrom

Board of Governors of the Federal Reserve System

Andrey Ermolov

Fordham University - Gabelli School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: August 11, 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 asymmetric GARCH and regime-switching models along several dimensions.

Keywords: non-Gaussianities, asymmetric volatility, GARCH, risk management, conditional skewness

JEL Classification: G11, G17

Suggested Citation

Bekaert, Geert and Engstrom, Eric C. and Ermolov, Andrey, Bad Environments Good Environments: A Non-Gaussian Asymmetric Volatility Model (August 11, 2014). Available at SSRN: https://ssrn.com/abstract=2480691 or http://dx.doi.org/10.2139/ssrn.2480691

Geert Bekaert (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

NY
United States

Eric C. Engstrom

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
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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