Interpreting financial market crashes as earthquakes: A new Early Warning System for medium term crashes |
| |
| Affiliation: | 1. Department of Accounting and Finance, University of Bristol, 8 Woodland Road, Bristol BS8 1TN, UK;2. Xfi Centre for Finance and Investment, University of Exeter, Streatham Court, Rennes Drive, Exeter EX4 4ST, UK;3. Essex Business School, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK;1. Department of Business Administration, Universidad Carlos III, Spain;2. D.G.A. Supervisión – Banco de España, Spain;1. Kent Business School, University of Kent, Canterbury, United Kingdom;2. Department of Mathematical Sciences, University of Essex, United Kingdom;1. Özyeğin University, Turkey;2. Georgia State University, United States;1. University of Sussex, United Kingdom;2. Lancaster University Management School, United Kingdom |
| |
| 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. |
| |
| Keywords: | Financial crashes Hawkes process Self-exciting process Early Warning System C13 C15 C53 G17 |
| 本文献已被 ScienceDirect 等数据库收录！ |
|
