Abstract:
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It is well-known that financial returns such as those obtained from S&P 500 index data exhibits conditional heteroscedasticity. In this study, we investigate whether the conditional volatility structures of S&P500 differ between economic recession and non-recession periods. This investigation was performed on S&P500 returns from1989 - 2015 as well as S&P 500 sector returns from 2007 - 2017. In initial investigations into an appropriate volatility model for this data, the EGARCH (1,1) was found to be the optimal model, indicating the underlying asymmetric conditional volatility structure caused by positive and negative shocks of news/innovation. Regression analysis on the logarithm of squared return data was performed to determine whether model parameters changed across different time segments. News Impact Curves (NIC) were plotted to visualize the underlying differences among models for the selected time periods. In general, negative news/shocks induced higher conditional volatility change than positive news/shocks. Results indicated that volatility structures during the non-recession periods are significantly different from those of the recession periods, with the latter inducing more volatility. S&P 500 sector returns also showed similar patterns.
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