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Bad environments, good environments: A non-Gaussian asymmetric volatility model

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  • Bekaert, Geert
  • Engstrom, Eric
  • Ermolov, Andrey

Abstract

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.

Suggested Citation

  • Bekaert, Geert & Engstrom, Eric & Ermolov, Andrey, 2015. "Bad environments, good environments: A non-Gaussian asymmetric volatility model," Journal of Econometrics, Elsevier, vol. 186(1), pages 258-275.
    • Handle: RePEc:eee:econom:v:186:y:2015:i:1:p:258-275
    DOI: 10.1016/j.jeconom.2014.06.021
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    More about this item

    Keywords

    Non-Gaussianities; GARCH; Asymmetric volatility; Conditional skewness; Risk management;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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