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Time-varying mixture GARCH models and asymmetric volatility

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  • Haas, Markus
  • Krause, Jochen
  • Paolella, Marc S.
  • Steude, Sven C.

Abstract

The class of mixed normal conditional heteroskedastic (MixN-GARCH) models, which couples a mixed normal distributional structure with GARCH-type dynamics, has been shown to offer a plausible decomposition of the contributions to volatility, as well as excellent out-of-sample forecasting performance, for financial asset returns. In this paper, we generalize the MixN-GARCH model by relaxing the assumption of constant mixing weights. Two different specifications with time-varying mixing weights are considered. In particular, by relating current weights to past returns and realized (component-wise) likelihood values, an empirically reasonable representation of Engle and Ng's (1993) news impact curve with an asymmetric impact of unexpected return shocks on future volatility is obtained. An empirical out-of-sample study confirms the usefulness of the new approach and gives evidence that the leverage effect in financial returns data is closely connected, in a non-linear fashion, to the time-varying interplay of mixture components representing, for example, various groups of market participants.

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Bibliographic Info

Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 26 (2013)
Issue (Month): C ()
Pages: 602-623

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Handle: RePEc:eee:ecofin:v:26:y:2013:i:c:p:602-623

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Web page: http://www.elsevier.com/locate/inca/620163

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Keywords: GARCH; News impact curve; Leverage effect; Down-market effect; Mixtures; Time-varying weights; Value-at-risk;

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Cited by:
  1. Chia-Lin Chang & Allen, David & McAleer, Michael, 2013. "Recent developments in financial economics and econometrics: An overview," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 26(C), pages 217–226.
  2. Jochen Krause & Marc S. Paolella, 2014. "A Fast, Accurate Method for Value-at-Risk and Expected Shortfall," Econometrics, MDPI, Open Access Journal, vol. 2(2), pages 98-122, June.
  3. Chia-Lin Chang & David Allen & Michael McAleer, 2013. "Recent Developments in Financial Economics and Econometrics: An Overview," Tinbergen Institute Discussion Papers 13-021/III, Tinbergen Institute.

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