The Impact of Shocks on Higher Moments
Eric Jondeau and Michael Rockinger*
Journal of Financial Econometrics, 2009, 7(2), 77-105.
Abstract
In this paper, we extend the concept of the news impact curve of volatility
developed by Engle and Ng (1993) to the higher moments and co-moments of the
multivariate generalized autoregressive conditional heteroskedasticity (GARCH)
model with non-normal innovations. For this purpose, we present a new methodology
to describe the joint distribution of GARCH processes in a non-normal setting.
Then, we provide expressions for the response of the moments of the subsequent
distribution to a shock. This tool enhances the understanding of the temporal
evolution of the joint distribution. We use our methodology to provide stylized
facts for the four largest international stock markets. In particular, we document
the persistence of large (positive or negative) daily returns. In a multivariate
setting , we find that foreign holdings provide a good hedge against changes
in domestic volatility after good shocks but a bad hedge after crashes. Finally,
using generalized impulse responses, we show that the effect of shocks on the
higher moments of the distribution is short-lasting.
Keywords: GARCH model, non-normality, kurtosis, skewness, stock returns, volatility
JEL Classifications: C22, C51, G12
* HEC Lausanne, Swiss Finance Institute