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Analysis of Asymmetric GARCH Volatility Models with Applications to Margin Measurement

Elena Goldman and Xiangjin Shen

Staff Working Papers from Bank of Canada

Abstract: We explore properties of asymmetric generalized autoregressive conditional heteroscedasticity (GARCH) models in the threshold GARCH (GTARCH) family and propose a more general Spline-GTARCH model, which captures high-frequency return volatility, low-frequency macroeconomic volatility as well as an asymmetric response to past negative news in both autoregressive conditional heteroscedasticity (ARCH) and GARCH terms. Based on maximum likelihood estimation of S&P 500 returns, S&P/TSX returns and Monte Carlo numerical example, we find that the proposed more general asymmetric volatility model has better fit, higher persistence of negative news, higher degree of risk aversion and significant effects of macroeconomic variables on the lowfrequency volatility component. We then apply a variety of volatility models in setting initial margin requirements for a central clearing counterparty (CCP). Finally, we show how to mitigate procyclicality of initial margins using a three-regime threshold autoregressive model.

Keywords: Econometric and statistical models; Payment clearing and settlement systems (search for similar items in EconPapers)
JEL-codes: C31 C36 E41 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2018
New Economics Papers: this item is included in nep-ecm and nep-ets
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