Exploiting Spillovers to Forecast Crashes
We develop Hawkes models in which events are triggered through self-excitation as well as cross-excitation. We examine whether incorporating cross-excitation improves the forecasts of extremes in asset returns compared to only self-excitation. The models are applied to US stocks, bonds and dollar exchange rates. We predict the probability of crashes in the series and the value at risk (VaR) over a period that includes the financial crisis of 2008 using a moving window. A Lagrange multiplier test suggests the presence of cross-excitation for these series. Out-of-sample, we find that the models that include spillover effects forecast crashes and the VaR significantly more accurately than the models without these effects.
|Keywords||Extremal dependence, Financial crashes, Hawkes processes, Spill-over, Value-at-risk|
|Persistent URL||dx.doi.org/10.1002/for.2434, hdl.handle.net/1765/96731|
|Series||ERIM Top-Core Articles , Econometric Institute Reprint Series|
|Journal||Journal of Forecasting|
Gresnigt, F, Kole, H.J.W.G, & Franses, Ph.H.B.F. (2016). Exploiting Spillovers to Forecast Crashes. Journal of Forecasting. doi:10.1002/for.2434