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Alternative Asymmetric Stochastic Volatility Models

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Author Info

  • Manabu Asai

    (Faculty of Economics, Soka University)

  • Michael McAleer

    (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University)

Abstract

The stochastic volatility model usually incorporates asymmetric effects by introducing the negative correlation between the innovations in returns and volatility. In this paper, we propose a new asymmetric stochastic volatility model, based on the leverage and size effects. The model is a generalization of the exponential GARCH (EGARCH) model of Nelson (1991). We consider categories for asymmetric effects, which describes the difference among the asymmetric effect of the EGARCH model, the threshold effects indicator function of Glosten, Jagannathan and Runkle (1992), and the negative correlation between the innovations in returns and volatility. The new model is estimated by the efficient importance sampling method of Liesenfeld and Richard (2003), and the finite sample properties of the estimator are investigated using numerical simulations. Four financial time series are used to estimate the alternative asymmetric SV models, with empirical asymmetric effects found to be statistically significant in each case. The empirical results for S&P 500 and Yen/USD returns indicate that the leverage and size effects are significant, supporting the general model. For TOPIX and USD/AUD returns, the size effect is insignificant, favoring the negative correlation between the innovations in returns and volatility. We also consider standardized t distribution for capturing the tail behavior. The results for Yen/USD returns show that the model is correctly specified, while the results for three other data sets suggest there is scope for improvement.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP739.pdf
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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 739.

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Length: 25pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:kyo:wpaper:739

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Keywords: Stochastic volatility; asymmetric effects; leverage; threshold; indicator function; importance sampling; numerical simulations.;

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  1. Fernández, C. & Steel, M.F.J., 1996. "On Bayesian Modelling of Fat Tails and Skewness," Discussion Paper 1996-58, Tilburg University, Center for Economic Research.
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Cited by:
  1. Asai, M. & McAleer, M.J. & Medeiros, M.C., 2010. "Asymmetry and Long Memory in Volatility Modelling," Econometric Institute Report EI 2010-60, Erasmus University Rotterdam, Econometric Institute.
  2. Michael McAleer, 2009. "The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges," Documentos del Instituto Complutense de Análisis Económico 0910, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.

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