GARCH-like Models with Dynamic Crash Probabilities
Koether, Paul
We work in the setting of time series of financial returns.
Our starting point are the GARCH models, which are very common in practice.
We introduce the possibility of having crashes in such GARCH models.
A crash will be modeled by drawing innovations from a distribution with much mass on extremely negative events, while in normal times the innovations will be drawn from a normal distribution.
The probability of a crash is modeled to be time ...