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GARCH Models with Fat-Tailed Distributions and the Hong Kong Stock Market Returns

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  • Zi-Yi Guo

Abstract

As one of the world’s largest securities markets, the Hong Kong stock market plays a significant role in facilitating the development of Chinese economy. In this paper, we investigate a suite of widely-used models, the GARCH models in risk management of the Hong Kong stock market returns. To account for conditional volatilities, we consider a new type of fat-tailed distribution, the normal reciprocal inverse Gaussian distribution (NRIG), and compare its empirical performance with two other popular types of fat-tailed distribution, the Student’s t distribution and the normal inverse Gaussian distribution (NIG). We show that the NRIG distribution performs slightly better than the other two types of distribution. Also, our results indicate that it is important to introduce both GJR-terms and the NRIG distribution to improve the models’ performance. Our results illustrate that the asymmetric GARCH NRIG model has practical advantages in quantitative risk management, and serves as a very useful tool for industry participants.

Suggested Citation

  • Zi-Yi Guo, 2017. "GARCH Models with Fat-Tailed Distributions and the Hong Kong Stock Market Returns," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(9), pages 1-28, August.
    • Handle: RePEc:ibn:ijbmjn:v:12:y:2017:i:9:p:28
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    References listed on IDEAS

    as
    1. Andersson, Jonas, 2001. "On the Normal Inverse Gaussian Stochastic Volatility Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 44-54, January.
    2. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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