Asymmetry, Loss Aversion and Forecasting

Stephen E. Satchell and Shaun A. Bond

No 160, Econometric Society 2004 Australasian Meetings from Econometric Society

Abstract: Conditional volatility models, such as GARCH, have been used extensively in financial applications to capture predictable variation in the second moment of asset returns. However, with recent theoretical literature emphasising the loss averse nature of agents, this paper considers models which capture time variation in the second lower partial moment. Utility based evaluation is carried out on several approaches to modelling the conditional second order lower partial moment (or semi-variance), including distribution and regime based models. The findings show that when agents are loss averse, there are utility gains to be made from using models which explicitly capture this feature (rather than trying to approximate using symmetric volatility models). In general direct approaches to modelling the semi-variance are preferred to distribution based models. These results are relevant to risk management and help to link the theoretical discussion on loss aversion to emprical modelling

Keywords: Asymmetry; loss aversion; semi-variance; volatility models. (search for similar items in EconPapers)
JEL-codes: C22 G10 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fin and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:ausm04:160

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