Autorregresive conditional volatility, skewness and kurtosis
This paper proposes a GARCH-type model allowing for time-varying volatility, skewness and kurtosis. The model is estimated assuming a Gram-Charlier series expansion of the normal density function for the error term, which is easier to estimate than the non-central t distribution proposed by Harvey and Siddique (1999). Moreover, this approach accounts for time-varying skewness and kurtosis while the approach by Harvey and Siddique (1999) only accounts for nonnormal skewness. We apply this method to daily returns of a variety of stock indices and exchange rates. Our results indicate a significant presence of conditional skewness and kurtosis. It is also found that specifications allowing for time-varying skewness and kurtosis outperform specifications with constant third and fourth moments.
|Date of creation:||2002|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.dfaeii.ehu.es
More information through EDIRC
|Order Information:|| Postal: Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lamoureux, Christopher G & Lastrapes, William D, 1993. "Forecasting Stock-Return Variance: Toward an Understanding of Stochastic Implied Volatilities," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 293-326.
- Das, Sanjiv Ranjan & Sundaram, Rangarajan K., 1999.
"Of Smiles and Smirks: A Term Structure Perspective,"
Journal of Financial and Quantitative Analysis,
Cambridge University Press, vol. 34(02), pages 211-239, June.
- Sanjiv R. Das & Rangarajan K. Sundaram, 1998. "Of Smiles and Smirks: A Term-Structure Perspective," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-024, New York University, Leonard N. Stern School of Business-.
- Engle, Robert F & Ng, Victor K, 1993.
" Measuring and Testing the Impact of News on Volatility,"
Journal of Finance,
American Finance Association, vol. 48(5), pages 1749-78, December.
- Robert F. Engle & Victor K. Ng, 1991. "Measuring and Testing the Impact of News on Volatility," NBER Working Papers 3681, National Bureau of Economic Research, Inc.
- Harvey, Campbell R. & Siddique, Akhtar, 1999. "Autoregressive Conditional Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(04), pages 465-487, December.
- Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
- Tim Bollerslev, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
EERI Research Paper Series
EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- Charles J. Corrado & Tie Su, 1996.
"Skewness And Kurtosis In S&P 500 Index Returns Implied By Option Prices,"
Journal of Financial Research,
Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, 06.
- Corrado, Charles J & Su, Tie, 1996. "Skewness and Kurtosis in S&P 500 Index Returns Implied by Option Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-92, Summer.
- Amin, Kaushik I & Ng, Victor K, 1997. "Inferring Future Volatility from the Information in Implied Volatility in Eurodollar Options: A New Approach," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 333-67.
- Jarrow, Robert & Rudd, Andrew, 1982. "Approximate option valuation for arbitrary stochastic processes," Journal of Financial Economics, Elsevier, vol. 10(3), pages 347-369, November.
- Peiro, Amado, 1999. "Skewness in financial returns," Journal of Banking & Finance, Elsevier, vol. 23(6), pages 847-862, June.
- Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
- Heston, Steven L & Nandi, Saikat, 2000. "A Closed-Form GARCH Option Valuation Model," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 585-625.
- Angel León & Juan Mora, 1999. "Modelling conditional heteroskedasticity: Application to the "IBEX-35" stock-return index," Spanish Economic Review, Springer, vol. 1(3), pages 215-238.
- David Backus & Silverio Foresi & Liuren Wu, 2002. "Accouting for Biases in Black-Scholes," Finance 0207008, EconWPA.
When requesting a correction, please mention this item's handle: RePEc:ehu:dfaeii:200206. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alcira Macías Redondo)
If references are entirely missing, you can add them using this form.