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The time-varying asymmetry of exchange rate returns : a stochastic volatility - stochastic skewness model

Martin Iseringhausen (UGent)
(2020) Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium.
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Abstract
While the time-varying volatility of financial returns has been extensively modelled, most existing stochastic volatility models either assume a constant degree of return shock asymmetry or impose symmetric model innovations. However, 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 allow for time-varying skewness of the return innovations. We estimate the model by extensions of traditional 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. In addition, stochastic skewness can help to improve forecasts of risk measures. Finally, the results support a potential link between carry trading and crash risk.
Keywords
Bayesian analysis, crash risk, foreign exchange, time variation

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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, Ghent University, Faculty of Economics and Business Administration, 2020.
APA
Iseringhausen, M. (2020). The time-varying asymmetry of exchange rate returns : a stochastic volatility - stochastic skewness model. Ghent, Belgium: Ghent University, Faculty of Economics and Business Administration.
Chicago author-date
Iseringhausen, Martin. 2020. “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.
Chicago author-date (all authors)
Iseringhausen, Martin. 2020. “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; 2020.
IEEE
[1]
M. Iseringhausen, “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 University, Faculty of Economics and Business Administration, Ghent, Belgium, 2020.
@misc{8557488,
  abstract     = {{While the time-varying volatility of financial returns has been extensively modelled, most existing stochastic volatility models either assume a constant degree of return shock asymmetry or impose symmetric model innovations. However, 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 allow for time-varying skewness of the return innovations. We estimate the model by extensions of traditional 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. In addition, stochastic skewness can help to improve forecasts of risk measures. Finally, the results support a potential link between carry trading and crash risk.}},
  articleno    = {{2018/944}},
  author       = {{Iseringhausen, Martin}},
  keywords     = {{Bayesian analysis,crash risk,foreign exchange,time variation}},
  language     = {{eng}},
  pages        = {{47}},
  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         = {{2020}},
}