A Better Asymmetric Model of Changing Volatility in Stock and Exchange Rate Returns: Trend-GARCH
AbstractThe impact of short run price trending on the conditional volatility is tested empirically. A new family of conditionally heteroscedastic models with a trend-dependent conditional variance equation: The Trend-GARCH model is described. Modern microeconomic theory often suggests the connection between the past behaviour of time series, the subsequent reaction of market individuals, and thereon changes in the future characteristics of the time series. Results reveal important properties of these models, which are consistent with stylized facts found in financial data sets. They can also be employed for model identification, estimation, and testing. The empirical analysis supports the existence of trend effects. The Trend-GARCH model proves to be superior to alternative models such as EGARCH, AGARCH, TGARCH OR GARCH-in-Mean in replicating the leverage effect in the conditional variance, in fitting the news impact curve and in fitting the volatility estimates from high frequency data. In addition, we show that the leverage effect is dependent on the current trend, i.e. it differentiates between bullish and bearish markets. Furthermore, trend effects can account for a significant part of the long memory property of asset price volatilities.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal The European Journal of Finance.
Volume (Year): 13 (2007)
Issue (Month): 1 ()
Contact details of provider:
Web page: http://www.tandfonline.com/REJF20
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Menkhoff, L., 1998. "The noise trading approach -- questionnaire evidence from foreign exchange," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 547-564, June.
- M. Angeles Carnero, 2004. "Persistence and Kurtosis in GARCH and Stochastic Volatility Models," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(2), pages 319-342.
- Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
- repec:uba:hadfwe:techtrademonpol_2003-07 is not listed on IDEAS
- Markku Lanne & Pentti Saikkonen, 2005.
"Modeling Conditional Skewness in Stock Returns,"
Economics Working Papers
ECO2005/14, European University Institute.
- Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996.
"Fractionally integrated generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 74(1), pages 3-30, September.
- Tom Doan, . "RATS programs to replicate Baillie, Bollerslev, Mikkelson FIGARCH results," Statistical Software Components RTZ00009, Boston College Department of Economics.
- Pierre Giot, 2005. "Market risk models for intraday data," The European Journal of Finance, Taylor & Francis Journals, vol. 11(4), pages 309-324.
- Bollerslev, Tim, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Domowitz, Ian & Hakkio, Craig S., 1985. "Conditional variance and the risk premium in the foreign exchange market," Journal of International Economics, Elsevier, vol. 19(1-2), pages 47-66, August.
- Lehar, Alfred & Scheicher, Martin & Schittenkopf, Christian, 2002. "GARCH vs. stochastic volatility: Option pricing and risk management," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 323-345, March.
- Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
- Bauer, Christian & Herz, Bernhard, 2005. "Technical trading, monetary policy, and exchange rate regimes," Global Finance Journal, Elsevier, vol. 15(3), pages 281-302, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.