We propose an extension of standard asymmetric volatility models in the generalized autoregressive conditional heteroskedasticity (GARCH) class that admits conditional non-Gaussianities in a tractable fashion. Our "bad environment-good environment" (BEGE) model utilizes two gamma-distributed shocks and generates a conditional shock distribution with time-varying heteroskedasticity, skewness, and kurtosis. The BEGE model features nontrivial news impact curves and closed-form solutions for higher-order moments. In an empirical application to stock returns, the BEGE model outperforms standard asymmetric GARCH and regime-switching models along several dimensions.
Bekaert, Geert, Eric Engstrom, and Andrey Ermolova. "Bad Environments, Good Environments: A Non-Gaussian Asymmetric Volatility Model." Journal of Econometrics 186, no. 1 (May 2015): 258-275.
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