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.

Additional Metadata
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 Econometric Institute Reprint Series
Journal Journal of Forecasting
Citation
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