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Bad Environments Good Environments: A Non-Gaussian Asymmetric Volatility Model

2014; RELX Group (Netherlands); Linguagem: Inglês

10.2139/ssrn.2480691

1556-5068

Geert Bekaert, Eric Engström, Andrey Ermolov,

Financial Risk and Volatility Modeling

We propose an extension of standard asymmetric volatility models in the generalized autoregressive conditional heteroskedasticity (GARCH) class that admits conditional non-Gaussianities in a tractable fashion. Our “bad environment-good environment" (BEGE) model utilizes two gamma-distributed shocks and generates a conditional shock distribution with time-varying heteroskedasticity, skewness, and kurtosis. The BEGE model features nontrivial news impact curves and closed-form solutions for higher-order moments. In an empirical application to stock returns, the BEGE model outperforms asymmetric GARCH and regime-switching models along several dimensions.