Long vs. short term asymmetry in volatility and the term structure of risk

Carl Lönnbark

Finance Research Letters, 2017, vol. 23, issue C, 202-209

Abstract: This short paper introduces the distinction between short and long term asymmetric effects in volatilities. With short term asymmetry we refer to the conventional one, i.e. the asymmetric response of current volatility to the most recent return shocks. In addition, we argue that there may be asymmetries with respect to the way the effect of past return shocks propagate over time. We refer to this as long term asymmetry and propose a model that enables the study of the potential occurrence of such a feature. In an empirical application using stock market index data we find evidence of the joint presence of short and long term asymmetric effects and demonstrate important implications for risk predictions. In particular, positive return shocks is ascribed substantial significance for long term risk prediction.

Keywords: Financial econometrics; GARCH; Memory; Risk prediction; Skewness (search for similar items in EconPapers)
JEL-codes: C22 C51 C58 G15 G17 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:23:y:2017:i:c:p:202-209

DOI: 10.1016/j.frl.2017.06.011

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