Modelling good and bad volatility
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.
|Date of creation:||Nov 2007|
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- Luc Bauwens & Sébastien Laurent, 2002.
"A New Class of Multivariate skew Densities, with Application to GARCH Models,"
Computing in Economics and Finance 2002
5, Society for Computational Economics.
- 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).
- Hansen, B.E., 1992.
"Autoregressive Conditional Density Estimation,"
RCER Working Papers
322, University of Rochester - Center for Economic Research (RCER).
- 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.
- Francesco Lisi, 2007. "Testing asymmetry in financial time series," Quantitative Finance, Taylor & Francis Journals, vol. 7(6), pages 687-696.
- 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.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
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