Modeling Market Downside Volatility

Tédongap Roméo, Feunou Bruno, Jahan-Parvar Mohammad
We propose a new methodology for modeling and estimating time-varying downside risk and upside uncertainty in equity returns and for assessment of risk–return trade-off in financial markets. Using the salient features of the binormal distribution, we explicitly relate downside risk and upside uncertainty to conditional heteroskedasticity and asymmetry through binormal GARCH (BiN-GARCH) model. Based on S&P 500 and international index returns, we find strong empirical support for existence of significant relative downside risk, and robust positive relationship between relative downside risk and conditional mode.
FEUNOU, B., JAHAN-PARVAR, M. et TÉDONGAP, R. (2013). Modeling Market Downside Volatility. Review of Finance (ex European Finance Review), 17(1), pp. 443-481.