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Modeling and forecasting expected shortfall with the generalized asymmetric Student-t and asymmetric exponential power distributions

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  • Zhu, Dongming
  • Galbraith, John W.

Abstract

Financial returns typically display heavy tails and some degree of skewness, and conditional variance models with these features often outperform more limited models. The difference in performance may be especially important in estimating quantities that depend on tail features, including risk measures such as the expected shortfall. Here, using recent generalizations of the asymmetric Student-t and exponential power distributions to allow separate parameters to control skewness and the thickness of each tail, we fit daily financial return volatility and forecast expected shortfall for the S&P 500 index and a number of individual company stocks; the generalized distributions are used for the standardized innovations in a nonlinear, asymmetric GARCH-type model. The results provide evidence for the usefulness of the general distributions in improving fit and prediction of downside market risk of financial assets. Constrained versions, corresponding with distributions used in the previous literature, are also estimated in order to provide a comparison of the performance of different conditional distributions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 18 (2011)
Issue (Month): 4 (September)
Pages: 765-778

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Handle: RePEc:eee:empfin:v:18:y:2011:i:4:p:765-778

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Asymmetric distribution Expected shortfall NGARCH model;

References

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Citations

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Cited by:
  1. Marcelo Brutti Righi & Paulo Sergio Ceretta, 2013. "Pair Copula Construction based Expected Shortfall estimation," Economics Bulletin, AccessEcon, vol. 33(2), pages 1067-1072.
  2. Nadarajah, Saralees & Chan, Stephen & Afuecheta, Emmanuel, 2013. "On the characteristic function for asymmetric Student t distributions," Economics Letters, Elsevier, vol. 121(2), pages 271-274.
  3. Rubio, Francisco Javier & Steel, Mark F. J., 2014. "Bayesian modelling of skewness and kurtosis with two-piece scale and shape transformations," MPRA Paper 57102, University Library of Munich, Germany.
  4. M. Caivano & A. Harvey, 2013. "Time series models with an EGB2 conditional distribution," Cambridge Working Papers in Economics 1325, Faculty of Economics, University of Cambridge.

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