Conditional Heteroskedasticity in Asset Returns: A New Approach
1991/03/01 by Daniel B. Nelson · 10,446 citations
Economics, Econometrics and Finance · #Asset (computer security) #Computer science #Econometrics #Economics #Financial Risk and Volatility Modeling #Financial economics #Heteroscedasticity #Market Dynamics and Volatility #Monetary Policy and Economic Impact
paper · doi:10.2307/2938260
published in Econometrica 59(2), 347 (Wiley)
openalex publication_date 1991/03/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/05
Abstract
This paper introduces an ARCH model (exponential ARCH) that (1) allows correlation between returns and volatility innovations (an important feature of stock market volatility changes), (2) eliminates the need for inequality constraints on parameters, and (3) allows for a straightforward interpretation of the "persistence" of shocks to volatility. In the above respects, it is an improvement over the widely-used GARCH model. The model is applied to study volatility changes and the risk premium on the CRSP Value-Weighted Market Index from 1962 to 1987. Copyright 1991 by The Econometric Society.
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