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Time-varying mixture GARCH models and asymmetric volatility


Haas, Markus; Krause, Jochen; Paolella, Marc S; Steude, Sven C (2013). Time-varying mixture GARCH models and asymmetric volatility. North American Journal of Economics and Finance, 26:602-623.

Abstract

The class of mixed normal conditional heteroskedastic (MixN-GARCH) models, which couples a mixed normal distributional structure with GARCH-type dynamics, has been shown to offer a plausible decomposition of the contributions to volatility, as well as excellent out-of-sample forecasting performance, for financial asset returns. In this paper, we generalize the MixN-GARCH model by relaxing the assumption of constant mixing weights. Two different specifications with time--varying mixing weights are considered. In particular, by relating current weights to past returns and realized (component-wise) likelihood values, an empirically reasonable representation of Engle and Ng's (1993) news impact curve with an asymmetric impact of unexpected return shocks on future volatility is obtained. An empirical out-of-sample study confirms the usefulness of the new approach and gives evidence that the leverage effect in financial returns data is closely connected, in a non-linear fashion, to the time--varying interplay of mixture components representing, for example, various groups of market participants.

Abstract

The class of mixed normal conditional heteroskedastic (MixN-GARCH) models, which couples a mixed normal distributional structure with GARCH-type dynamics, has been shown to offer a plausible decomposition of the contributions to volatility, as well as excellent out-of-sample forecasting performance, for financial asset returns. In this paper, we generalize the MixN-GARCH model by relaxing the assumption of constant mixing weights. Two different specifications with time--varying mixing weights are considered. In particular, by relating current weights to past returns and realized (component-wise) likelihood values, an empirically reasonable representation of Engle and Ng's (1993) news impact curve with an asymmetric impact of unexpected return shocks on future volatility is obtained. An empirical out-of-sample study confirms the usefulness of the new approach and gives evidence that the leverage effect in financial returns data is closely connected, in a non-linear fashion, to the time--varying interplay of mixture components representing, for example, various groups of market participants.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:2013
Deposited On:23 Dec 2013 14:35
Last Modified:10 May 2024 01:46
Publisher:Elsevier
ISSN:1062-9408
OA Status:Green
Publisher DOI:https://doi.org/10.1016/j.najef.2013.02.024
Other Identification Number:merlin-id:8713
  • Content: Accepted Version