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Mixed Exponential Power Asymmetric Conditional Heteroskedasticity

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  • Mohammed Bouaddi
  • Jeroen V.K. Rombouts

Abstract

To match the stylized facts of high frequency financial time series precisely and parsimoniously, this paper presents a finite mixture of conditional exponential power distributions where each component exhibits asymmetric conditional heteroskedasticity. We provide stationarity conditions and unconditional moments to the fourth order. We apply this new class to Dow Jones index returns. We find that a two-component mixed exponential power distribution dominates mixed normal distributions with more components, and more parameters, both in-sample and out-of-sample. In contrast to mixed normal distributions, all the conditional variance processes become stationarity. This happens because the mixed exponential power distribution allows for component-specific shape parameters so that it can better capture the tail behaviour. Therefore, the more general new class has attractive features over mixed normal distributions in our application: Less components are necessary and the conditional variances in the components are stationarity processes. Results on NASDAQ index returns are similar.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0749.

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Date of creation: 2007
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Handle: RePEc:lvl:lacicr:0749

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Keywords: Finite mixtures; exponential power distributions; conditional heteroskedasticity; asymmetry; heavy tails; value at risk;

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Cited by:
  1. Zhu, Dongming & Galbraith, John W., 2011. "Modeling and forecasting expected shortfall with the generalized asymmetric Student-t and asymmetric exponential power distributions," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 765-778, September.
  2. Jeroen Rombouts & Lars Peter Stentoft, 2009. "Bayesian Option Pricing Using Mixed Normal Heteroskedasticity Models," CIRANO Working Papers 2009s-19, CIRANO.
  3. Simon A. BRODA & Markus HAAS & Jochen KRAUSE & Marc S. PAOLELLA & Sven C. STEUDE, . "Stable Mixture GARCH Models," Swiss Finance Institute Research Paper Series 11-39, Swiss Finance Institute.
  4. Yin-Wong Cheung & Sang-Kuck Chung, 2011. "A Long Memory Model with Normal Mixture GARCH," Computational Economics, Society for Computational Economics, vol. 38(4), pages 517-539, November.

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