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The Time-Varying Asymmetry of Exchange Rate Returns : A Stochastic Volatility - Stochastic Skewness Model

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Abstract
While the volatility of financial returns has been extensively modelled as time-varying, skewness is usually either assumed constant or neglected by assuming symmetric model innovations. However, it has long been understood that accounting for (time-varying) asymmetry as a measure of crash risk is important for both investors and policy makers. This paper extends a standard stochastic volatility model to account for time-varying skewness. We estimate the model by extensions of traditional Bayesian Markov Chain Monte Carlo (MCMC) methods for stochastic volatility models. When applying this model to the returns of four major exchange rates, skewness is found to vary substantially over time. The results support a potential link between carry trading and crash risk. Finally, investors appear to demand compensation for a negatively skewed return distribution.
Keywords
Bayesian analysis, crash risk, foreign exchange, time variation

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Chicago
Iseringhausen, Martin. 2018. “The Time-Varying Asymmetry of Exchange Rate Returns : A Stochastic Volatility - Stochastic Skewness Model.” Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium. Ghent, Belgium: Ghent University, Faculty of Economics and Business Administration.
APA
Iseringhausen, M. (2018). The Time-Varying Asymmetry of Exchange Rate Returns : A Stochastic Volatility - Stochastic Skewness Model. Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium. Ghent, Belgium: Ghent University, Faculty of Economics and Business Administration.
Vancouver
1.
Iseringhausen M. The Time-Varying Asymmetry of Exchange Rate Returns : A Stochastic Volatility - Stochastic Skewness Model. Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium. Ghent, Belgium: Ghent University, Faculty of Economics and Business Administration; 2018.
MLA
Iseringhausen, Martin. “The Time-Varying Asymmetry of Exchange Rate Returns : A Stochastic Volatility - Stochastic Skewness Model.” Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 2018 : n. pag. Print.
@misc{8557488,
  abstract     = {While the volatility of financial returns has been extensively modelled as time-varying, skewness is usually either assumed constant or neglected by assuming symmetric model innovations. However, it has long been understood that accounting for (time-varying) asymmetry as a measure of crash risk is important for both investors and policy makers. This paper extends a standard stochastic volatility model to account for time-varying skewness. We estimate the model by extensions of traditional Bayesian Markov Chain Monte Carlo (MCMC) methods for stochastic volatility models. When applying this model to the returns of four major exchange rates, skewness is found to vary substantially over time. The results support a potential link between carry trading and crash risk. Finally, investors appear to demand compensation for a negatively skewed return distribution.},
  articleno    = {2018/944},
  author       = {Iseringhausen, Martin},
  keyword      = {Bayesian analysis,crash risk,foreign exchange,time variation},
  language     = {eng},
  pages        = {33},
  publisher    = {Ghent University, Faculty of Economics and Business Administration},
  series       = {Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium},
  title        = {The Time-Varying Asymmetry of Exchange Rate Returns : A Stochastic Volatility - Stochastic Skewness Model},
  year         = {2018},
}