ALRIGHT: Asymmetric LaRge-Scale(I)GARCH with Hetero-Tails

Marc S. Paolella
Additional contact information
Marc S. Paolella: University of Zurich and Swiss Finance Institute

No 10-27, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: It is well-known in empirical finance that virtually all asset returns, whether monthly, daily, or intraday, are heavy-tailed and, particularly for stock returns, are mildly but often significantly negatively skewed. However, the tail indices, or maximally existing moments of the returns, can differ markedly across assets. To accommodate these stylized facts when modeling the joint distribution of asset returns, an asymmetric extension of the metaelliptical t distribution is proposed. While the likelihood is tractable, for high dimensions it will be impractical to use for estimation. To address this, a fast, two-step estimation procedure is developed, based on a saddlepoint approximation to the noncentral Student’s t distribution. The model is extended to support a CCC-(I)GARCH structure and demonstrated by modeling and forecasting the return series comprising the DJIA. The techniques of shrinkage, time-varying parameters, and weighted likelihood are employed to further enhance the forecasting performance of the model with no added computational burden.

Keywords: Asymmetry; Copula; Density Forecasting; Empirical Finance; Fat Tails; GARCH; Integrated GARCH; Multivariate Distribution; Saddlepoint Approximation; Shrinkage Estimation; Weighted Likelihood (search for similar items in EconPapers)
JEL-codes: C13 C32 G11 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2010-06, Revised 2010-06
References: Add references at CitEc
Citations:

Downloads: (external link)
http://ssrn.com/abstract=1628146 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1027

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().