Caivano, M. and Harvey, A. C.

Two EGARCH models and one fat tail

CWPE1326

Abstract: We compare two EGARCH models which belong to a new class of models in which the dynamics are driven by the score of the conditional distribution of the observations. Models of this kind are called dynamic conditional score (DCS) models and their form facilitates the development of a comprehensive and relatively straightforward theory for the asymptotic distribution of the maximum likelihood estimator. The EGB2 distribution is light-tailed, but with higher kurtosis than the normal. Hence it is complementary to the fat-tailed t. The EGB2-EGARCH model gives a good fit to many exchange rate return series, prompting an investigation into the misleading conclusions liable to be drawn from tail index estimates.

Keywords: Exchange rates, heavy tails, Hill's estimator score, robustness Student's t tail index

JEL Codes: C22 G17

Author links: Andrew Harvey

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1326.pdf