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Time-varying mixture GARCH models and asymmetric volatility
Haas, Markus
Krause, Jochen
Paolella, Marc S.
Steude, Sven C.
Markus Haas
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.
Haas, Markus & Krause, Jochen & Paolella, Marc S. & Steude, Sven C., 2013. "Time-varying mixture GARCH models and asymmetric volatility," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 602-623.
Handle: RePEc:eee:ecofin:v:26:y:2013:i:c:p:602-623
DOI: 10.1016/j.najef.2013.02.024
File URL: http://www.sciencedirect.com/science/article/pii/S1062940813000399
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GARCH; News impact curve; Leverage effect; Down-market effect; Mixtures; Time-varying weights; Value-at-risk;
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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