Asymmetric excitation of left- and right-tail extreme events probed using a Hawkes model: application to financial returns

Matthew F. Tomlinson, David Greenwood and Marcin Mucha-Kruczynski

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Abstract: We construct a two-tailed peak-over-threshold Hawkes model that captures asymmetric self- and cross-excitation in and between left- and right-tail extreme values within a time series. We demonstrate its applicability by investigating extreme gains and losses within the daily log-returns of the S&P 500 equity index. We find that the arrivals of extreme losses and gains are described by a common conditional intensity to which losses contribute twice as much as gains. However, the contribution of the former decays almost five times more quickly than that of the latter. We attribute these asymmetries to the different reactions of market traders to extreme upward and downward movements of asset prices: an example of negativity bias, wherein trauma is more salient than euphoria.

Date: 2020-11, Revised 2021-08
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Published in Phys. Rev. E 104, 024112 (2021)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2011.12291

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