Is Volatility the Best Predictor of Market Crashes? |
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| Authors: | Chikashi Tsuji |
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| Institution: | (1) Faculty of Business Administration, Ritsumeikan University, 1-1-1 Noji-higashi, Kusatsu, Shiga 525-8577, Japan |
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| Abstract: | The objective of this paper is to determine the best predictor of equity market crashes by focusing particularly on volatility and market liquidity. In finance, volatility has traditionally been regarded as the best measure of market risk. However, this paper shows that the forecast value of market liquidity, in particular our modified calculated market depth, predicts equity market crashes much more accurately than does the forecast values of EGARCH or Implied Volatility. |
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| Keywords: | leverage effect market clearing function market crash market liquidity price-adjustment function time-varying risk premiums theory Value at Risk |
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