Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/98894
Authors: 
Gresnigt, Francine
Kole, Erik
Franses, Philip Hans
Year of Publication: 
2014
Series/Report no.: 
Tinbergen Institute Discussion Paper 14-067/III
Abstract: 
We propose a modeling framework which allows for creating probability predictions on a future market crash in the medium term, like sometime in the next five days. Our framework draws upon noticeable similarities between stock returns around a financial market crash and seismic activity around earthquakes. Our model is incorporated in an Early Warning System for future crash days. Testing our EWS on S&P 500 data during the recent financial crisis, we find positive Hanssen-Kuiper Skill Scores. Furthermore our modeling framework is capable of exploiting information in the returns series not captured by well known and commonly used volatility models. EWS based on our models outperform EWS based on the volatility models forecasting extreme price movements, while forecasting is much less time-consuming.
Subjects: 
Financial crashes
Hawkes process
self-exciting process
Early Warning System
JEL: 
C13
C15
C53
G17
Document Type: 
Working Paper

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