EconPapers    
Economics at your fingertips  
 

The Equity Index Skew, Market Crashes and Asymmetric Normal Mixture GARCH

Carol Alexandra () and Emese Lazar ()
Additional contact information
Carol Alexandra: ICMA Centre, University of Reading
Emese Lazar: ICMA Centre, University of Reading

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: The skewness in physical distributions of equity index returns and the implied volatility skew in the risk-neutral measure are subjects of extensive academic research. Much attention is now being focused on models that are able to capture time-varying conditional skewness and kurtosis. For this reason normal mixture GARCH(1,1) models have become very popular in financial econometrics. We introduce further asymmetries into this class of models by modifying the GARCH(1,1) variance processes to skewed variance processes with leverage effects. These asymmetric normal mixture GARCH models can differentiate between two different sources of asymmetry: a persistent asymmetry due to the different means in the conditional normal mixture distributions, and a dynamic asymmetry (the leverage effect) due to the skewed GARCH processes. Empirical results on five major equity indices first employ many statistical criteria to determine whether asymmetric (GJR and AGARCH) normal mixture GARCH models can improve on asymmetric normal and Student's-t GARCH specifications. These models were also used to simulate implied volatility smiles for the S&P index, and we find that much the most realistic skews are obtained from a GARCH model with a mixture of two GJR variance components.

Keywords: GARCH process; normal misture; equity skew; market crash; skew persistence; leverage effect (search for similar items in EconPapers)
JEL-codes: C32 G13 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2004-10
References: Add references at CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Downloads: (external link)
http://www.icmacentre.ac.uk/pdf/discussion/DP2004-14.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.icmacentre.ac.uk/pdf/discussion/DP2004-14.pdf [302 Found]--> https://www.icmacentre.ac.uk/pdf/discussion/DP2004-14.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:rdg:icmadp:icma-dp2004-13

Access Statistics for this paper

More papers in ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading Contact information at EDIRC.
Bibliographic data for series maintained by Marie Pearson ().

 
Page updated 2021-10-21
Handle: RePEc:rdg:icmadp:icma-dp2004-13