Volatility models for asymmetric shocks

GARCH Models in Python

Chelsea Yang

Data Science Instructor

Asymmetric shocks in financial data

News impact curve:

News impact curve

GARCH Models in Python

Leverage effect

  • Debt-equity Ratio = Debt $/$ Equity

  • Stock price goes down, debt-equity ratio goes up

  • Riskier!

Debt burden

GARCH Models in Python

GJR-GARCH

GJP-GARCH formula

GARCH Models in Python

GJR-GARCH in Python

arch_model(my_data, p = 1, q = 1, o = 1,
           mean = 'constant', vol = 'GARCH')

GJR-GARCH model fitting summary

GARCH Models in Python

EGARCH

  • A popular option to model asymmetric shocks

  • Exponential GARCH

  • Add a conditional component to model the asymmetry in shocks similar to the GJR-GARCH

  • No non-negative constraints on alpha, beta so it runs faster

GARCH Models in Python

EGARCH in Python

arch_model(my_data, p = 1, q = 1, o = 1,
           mean = 'constant', vol = 'EGARCH')

EGARCH model fitting summary

GARCH Models in Python

Which model to use

GJR-GARCH or EGARCH?

Which model is better depends on the data

Which to choose

GARCH Models in Python

Let's practice!

GARCH Models in Python

Preparing Video For Download...