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Leverage effect for volatility with generalized Laplace error

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Author

Summary, in English

We propose a new model that accounts for the asymmetric response of volatility to positive (`good news') and negative (`bad news') shocks in economic time series – the so-called leverage effect. In the past, asymmetric powers of errors in the conditionally heteroskedastic models have been used to capture this effect. Our model is using the gamma difference representation of the generalized Laplace distributions that efficiently models the asymmetry. It has one additional natural parameter, the shape, that is used instead of power in the asymmetric power models to capture the strength of a long-lasting effect of shocks. Some fundamental properties of the model are provided including the formula for covariances and an explicit form for the conditional distribution of `bad' and `good' news processes given the past – the property that is important for statistical fitting of the model. Relevant features of volatility models are illustrated using S&P 500 historical data.

Publishing year

2014

Language

English

Pages

157-166

Publication/Series

Economic Quality Control

Volume

29

Issue

2

Document type

Journal article

Publisher

De Gruyter

Topic

  • Probability Theory and Statistics

Keywords

  • Heavy Tails
  • Volatility Clustering
  • Generalized Asymmetric Laplace Distribution
  • Leverage Effect
  • Conditional Heteroskedasticity
  • Asymmetric Power Volatility
  • GARCH Models

Status

Published

ISBN/ISSN/Other

  • ISSN: 1869-6147