Exploiting Spillovers to Forecast Crashes

Tinbergen Institute Discussion Paper 15-118/III

37 Pages Posted: 24 Oct 2015

See all articles by Francine Gresnigt

Francine Gresnigt

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Erik Kole

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM; Tinbergen Institute

Philip Hans Franses

Erasmus University Rotterdam (EUR) - Department of Econometrics

Date Written: October 21, 2015

Abstract

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

Gresnigt, Francine and Kole, Erik and Franses, Philip Hans, Exploiting Spillovers to Forecast Crashes (October 21, 2015). Tinbergen Institute Discussion Paper 15-118/III, Available at SSRN: https://ssrn.com/abstract=2678888 or http://dx.doi.org/10.2139/ssrn.2678888

Francine Gresnigt (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erik Kole

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 12 58 (Phone)

HOME PAGE: http://people.few.eur.nl/kole

ERIM

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://people.few.eur.nl/kole

Philip Hans Franses

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1278 (Phone)
+31 10 408 9162 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
90
Abstract Views
984
rank
393,662
PlumX Metrics