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Leveraging

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. Egarch.

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Leveraging

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  1. 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. K. Ensor, STAT 421

  2. 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. K. Ensor, STAT 421

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

  4. 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). K. Ensor, STAT 421

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