Exploiting Spillovers to Forecast Crashes
Tinbergen Institute Discussion Paper 15-118/III
37 Pages Posted: 24 Oct 2015
Date Written: October 21, 2015
We develop Hawkes models in which events are triggered through self 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. In-sample, a Lagrange Multiplier test indicates the existence of cross-excitation for these series. Out-of-sample, we find that the models that include spillover effects forecast crashes and the Value-at-Risk significantly more accurately than the models without.
Keywords: Hawkes processes, extremal dependence, Value-at-Risk, financial crashes, spillover
JEL Classification: G01, G17
Suggested Citation: Suggested Citation