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Modelling good and bad volatility

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  • Matteo Pelagatti

Abstract

The returns of many financial assets show significant skewness, but in the literature this issue is only marginally dealt with. Our conjecture is that this distributional asymmetry may be due to two different dynamics in positive and negative returns. In this paper we propose a process that allows the simultaneous modelling of skewed conditional returns and different dynamics in their conditional second moments. The main stochastic properties of the model are analyzed and necessary and sufficient conditions for weak and strict stationarity are derived. An application to the daily returns on the principal index of the London Stock Exchange supports our model when compared to other frequently used GARCH-type models, which are nested into ours.

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File URL: http://www.statistica.unimib.it/utenti/WorkingPapers/WorkingPapers/20071101.pdf
File Function: First version, November 2007
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Bibliographic Info

Paper provided by Università degli Studi di Milano-Bicocca, Dipartimento di Statistica in its series Working Papers with number 20071101.

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Length: 13 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:mis:wpaper:20071101

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Keywords: Volatility; Skewness; GARCH; Asymmetric Dynamics; Stationarity;

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References

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  1. Pentti Saikkonen & Markku Lanne, 2004. "A Skewed GARCH-in-Mean Model: An Application to U.S. Stock Returns," Econometric Society 2004 North American Summer Meetings 469, Econometric Society.
  2. Francesco Lisi, 2007. "Testing asymmetry in financial time series," Quantitative Finance, Taylor & Francis Journals, vol. 7(6), pages 687-696.
  3. BAUWENS, Luc & LAURENT, Sébastien, 2002. "A new class of multivariate skew densities, with application to GARCH models," CORE Discussion Papers 2002020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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Cited by:
  1. Tseng, Jie-Jun & Li, Sai-Ping, 2011. "Asset returns and volatility clustering in financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(7), pages 1300-1314.
  2. Geon Ho Choe & Kyungsub Lee, 2013. "Conditional correlation in asset return and GARCH intensity model," Papers 1311.4977, arXiv.org.

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