Cristina Amado and Helinä Laakkonen
- Published in print:
- 2014
- Published Online:
- August 2014
- ISBN:
- 9780199679959
- eISBN:
- 9780191760136
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199679959.003.0006
- Subject:
- Economics and Finance, Econometrics
The “unusually uncertain” phase in the global financial markets has inspired many researchers to study the effects of ambiguity (or “Knightian uncertainty”) on the decisions made by investors and ...
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The “unusually uncertain” phase in the global financial markets has inspired many researchers to study the effects of ambiguity (or “Knightian uncertainty”) on the decisions made by investors and their implications for the capital markets. We contribute to this literature by using a modified version of the time-varying GARCH model of Amado and Teräsvirta (2013) to analyze whether the increasing uncertainty has caused excess volatility in the US and European government bond markets. In our model, volatility is multiplicatively decomposed into two time-varying conditional components: the first being captured by a stable GARCH(1,1) process and the second driven by the level of uncertainty in the financial market.Less
The “unusually uncertain” phase in the global financial markets has inspired many researchers to study the effects of ambiguity (or “Knightian uncertainty”) on the decisions made by investors and their implications for the capital markets. We contribute to this literature by using a modified version of the time-varying GARCH model of Amado and Teräsvirta (2013) to analyze whether the increasing uncertainty has caused excess volatility in the US and European government bond markets. In our model, volatility is multiplicatively decomposed into two time-varying conditional components: the first being captured by a stable GARCH(1,1) process and the second driven by the level of uncertainty in the financial market.
