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

Geert Bekaert, Eric Engstrom and Andrey Ermolov

Journal of Econometrics, 2015, vol. 186, issue 1, 258-275

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.

Keywords: Non-Gaussianities; GARCH; Asymmetric volatility; Conditional skewness; Risk management (search for similar items in EconPapers)
JEL-codes: G11 G17 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:186:y:2015:i:1:p:258-275

DOI: 10.1016/j.jeconom.2014.06.021

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