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5) Asymemtric - GRACH
5) Asymemtric - GRACH
Giacomo Morelli
March 9, 2022
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Leverage Effect
The sign of the return doesn’t play any role in volatility dynamics.
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Volatility Clustering
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Leverage Effect
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The Negative Sign/Negative Size Bias Tests
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The Negative Sign/Negative Size Bias Tests
ẑ 2 = c0 + c1 I(rt−1 <0) + ut
The test statistics are the t-stats of the c1 coefficients in the two
regressions.
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S&P 500 returns: Asymmetry after GARCH?
Figure: S&P 500 Lagged Returns vs. Std Residuals. Volatility asymmetry test:
Negative Sign, Stat = 12.7839, p-value = 0.0004
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Asymmetric Volatility Models
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TARCH
σt2 = ω + αrt−1
2 2
+ γrt−1 I− 2
t−1 + βσt−1
where I−
t is 1 if rt < 0 and 0 otherwise, ω > 0, α > 0, β > 0,
α + γ/2 + β < 1.
The persistence of the TARCH is α + γ/2 + β.
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TARCH: Remarks
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TARCH: Properties
Unconditional variance:
ω
σ2 =
(1 − α − γ/2 − β)
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EGARCH
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EGARCH: Remarks
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TARCH Simulation Illustration
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TARCH Simulation Illustration
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TARCH Simulation Illustration
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TARCH Simulation Illustration
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TARCH Simulation Illustration
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TARCH Simulation Illustration
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EGARCH Simulation Illustration
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EGARCH Simulation Illustration
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TARCH Simulation Illustration
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EGARCH Simulation Illustration
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EGARCH Simulation Illustration
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EGARCH Simulation Illustration
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Modeling S&P 500 Volatility
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S&P 500 Estimates
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S&P 500 Volatility Comparison
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S&P 500 Volatility Comparison: Zoom
Figure: Zoom on the European Sovereign Debt Crisis Period. Cumulative Returns.
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S&P 500 Volatility Comparison: Zoom
Figure: Zoom on the European Sovereign Debt Crisis Period. GARCH, TARCH,
EGARCH.
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Remarks
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News Impact Curves
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News Impact Curves
GARCH: NICG (r ) = (ω + βσ 2 ) + αr 2
The impact of returns on the conditional variance is a quadratic
function.
TARCH: NICT (r ) = (ω + βσ 2 ) + (α + γI(r <0) )r 2
The impact of returns on the conditional variance is a quadratic
function with different curvatures depending on the sign of r .
% &
EGARCH: NICE (r ) = exp(ω + β log σ 2 + α |rσ| − m + γ σr )
where m = E[|z|].
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S&P 500 Volatility Comparison: Zoom
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