 GARCH-M model with an asymmetric risk premium: Distinguishing between ‘good’ and ‘bad’ volatility periodsJuri Trifonov and Bogdan Potanin International Review of Financial Analysis, 2024, vol. 91, issue C Abstract: We proposed a new method (GARCH-M-GJR-LEV) that captures the asymmetry in the variance and return equations. The development of the model is encouraged by the stylized fact that investors demand a higher risk premium during “bad” volatility periods rather than “good” ones. To study the properties of the obtained estimators, we conducted simulated data analysis, considering a data-generating process characterized by asymmetric responses of risk premium to volatility changes. As a result, we have found statistical evidence in favor of a significant advantage of the proposed method compared to existing alternatives. Further, the proposed model was applied to study the S&P 500 market index. We have found evidence of an asymmetric relationship between the risk premium and volatility changes during most periods under consideration. Due to this, the GARCH-M-GJR-LEV model usually outperformed the alternative GARCH family models according to the information criteria. Keywords: GARCH; Leverage effect; Risk premium; Conditional volatility (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:91:y:2024:i:c:s105752192300457x DOI: 10.1016/j.irfa.2023.102941 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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