Leveraging Bad news – negative shocks – have a larger impact on volatility than good news or positive shocks. This asymmetry is incorporated in a GARCH.

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GARCH Models and Asymmetric GARCH models

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Presentation transcript:

Leveraging Bad news – negative shocks – have a larger impact on volatility than good news or positive shocks. This asymmetry is incorporated in a GARCH framework by the inclusion of a “leverage” effect. Spring 2004 K. Ensor, STAT 421

Egarch The exponential GARCH formulation models the log of the conditional variance as an ARMA structure with asymmetric innovations. An advantage of modeling the “log” of the process – variances are guaranteed to be positive. Spring 2004 K. Ensor, STAT 421

Egarch – the model (compare parameterization that of Splus) Spring 2004 K. Ensor, STAT 421

Other variants – Splus documentation (Zivot) Power GARCH – return to modeling the conditional variance. Consider other behaviors the “squared GARCH behavior”. Threshold GARCH – set a threshold for different models to kick in (leveraging is automatic). Spring 2004 K. Ensor, STAT 421