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Bad environments, good environments: A non-Gaussian asymmetric volatility model

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  • Bekaert, Geert
  • Engstrom, Eric
  • Ermolov, Andrey

Abstract

We propose an extension of standard asymmetric volatility models in the generalized autoregressive conditional heteroskedasticity (GARCH) class that admits conditional non-Gaussianities in a tractable fashion. Our “bad environment–good environment” (BEGE) model utilizes two gamma-distributed shocks and generates a conditional shock distribution with time-varying heteroskedasticity, skewness, and kurtosis. The BEGE model features nontrivial news impact curves and closed-form solutions for higher-order moments. In an empirical application to stock returns, the BEGE model outperforms asymmetric GARCH and regime-switching models along several dimensions.

Suggested Citation

  • Bekaert, Geert & Engstrom, Eric & Ermolov, Andrey, 2015. "Bad environments, good environments: A non-Gaussian asymmetric volatility model," Journal of Econometrics, Elsevier, vol. 186(1), pages 258-275.
  • Handle: RePEc:eee:econom:v:186:y:2015:i:1:p:258-275
    DOI: 10.1016/j.jeconom.2014.06.021
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    Cited by:

    1. Segal, Gill & Shaliastovich, Ivan & Yaron, Amir, 2015. "Good and bad uncertainty: Macroeconomic and financial market implications," Journal of Financial Economics, Elsevier, vol. 117(2), pages 369-397.
    2. repec:eee:jbfina:v:88:y:2018:i:c:p:161-175 is not listed on IDEAS
    3. repec:eee:finana:v:53:y:2017:i:c:p:94-111 is not listed on IDEAS
    4. Herrera, R. & Clements, A.E., 2018. "Point process models for extreme returns: Harnessing implied volatility," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 161-175.
    5. repec:eee:ecofin:v:44:y:2018:i:c:p:92-108 is not listed on IDEAS
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    7. repec:taf:oaefxx:v:4:y:2016:i:1:p:1220711 is not listed on IDEAS
    8. Riccardo Colacito & Eric Ghysels & Jinghan Meng & Wasin Siwasarit, 2016. "Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory," Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 2069-2109.
    9. Stanislav Anatolyev & Stanislav Khrapov, 2015. "Right on Target, or Is it? The Role of Distributional Shape in Variance Targeting," Econometrics, MDPI, Open Access Journal, vol. 3(3), pages 1-23, August.
    10. repec:eee:eneeco:v:67:y:2017:i:c:p:136-145 is not listed on IDEAS

    More about this item

    Keywords

    Non-Gaussianities; GARCH; Asymmetric volatility; Conditional skewness; Risk management;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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