The time-varying asymmetry of exchange rate returns: A stochastic volatility – stochastic skewness model

Martin Iseringhausen

Journal of Empirical Finance, 2020, vol. 58, issue C, 275-292

Abstract: While the time-varying volatility of financial returns has been extensively modelled, most existing stochastic volatility models either assume a constant degree of return shock asymmetry or impose symmetric model innovations. However, accounting for time-varying asymmetry as a measure of crash risk is important for both investors and policy makers. This paper extends a standard stochastic volatility model to allow for time-varying skewness of the return innovations. We estimate the model by extensions of traditional Markov Chain Monte Carlo (MCMC) methods for stochastic volatility models. When applying this model to the returns of four major exchange rates, skewness is found to vary substantially over time. In addition, stochastic skewness can help to improve forecasts of risk measures. Finally, the results support a potential link between carry trading and crash risk.

Keywords: Bayesian analysis; Crash risk; Foreign exchange; Time variation (search for similar items in EconPapers)
JEL-codes: C11 C58 F31 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: THE TIME-VARYING ASYMMETRY OF EXCHANGE RATE RETURNS: A STOCHASTIC VOLATILITY – STOCHASTIC SKEWNESS MODEL (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:58:y:2020:i:c:p:275-292

DOI: 10.1016/j.jempfin.2020.06.008

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