The Impact of News on Higher Moments
61 Pages Posted: 26 Nov 2006
Date Written: November 2006
In this paper, we extend the concept of News Impact Curve developed by Engle and Ng (1993) to the higher moments of the multivariate returns' distribution, thereby providing a tool to investigate the impact of shocks on the characteristics of the subsequent distribution. For this purpose, we present a new methodology to describe the joint distribution of returns in a non-normal setting. This methodology allows to gain a better understanding of the temporal evolution of the returns' distribution and can be used to analyze the behavior of the optimal portfolio distribution. We apply our methodology to provide stylized facts on the four largest international stock markets. In particular, we document the persistence in large (positive or negative) daily returns. In a multivariate setting, we find that foreign holdings provide a good hedge against changes in domestic volatility after good shocks but a bad hedge after crashes.
Keywords: Volatility, Skewness, Kurtosis, GARCH model, Multivariate skewed Student t distribution, Stock returns
JEL Classification: C22, C51, G12
Suggested Citation: Suggested Citation