Two EGARCH models and one fat tail

Michele Caivano and Andrew Harvey

No 954, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We compare two EGARCH models, which belong to a new class of models in which the dynamics are driven by the score of the conditional distribution of the observations. Models of this kind are called dynamic conditional score (DCS) models and their form facilitates the development of a comprehensive and relatively straightforward theory for the asymptotic distribution of the maximum likelihood estimator. The EGB2 distribution is light-tailed, but with a higher kurtosis than the normal distribution. Hence it is complementary to the fat-tailed t. The EGB2-EGARCH model gives a good fit to many exchange rate return series, prompting an investigation into the misleading conclusions liable to be drawn from tail index estimates.

Keywords: exchange rates; heavy tails; Hill�s estimator; score; robustness; EGB2; Student�s t; tail index (search for similar items in EconPapers)
JEL-codes: C22 G17 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-ets
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Two EGARCH models and one fat tail (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_954_14

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