FORECASTING MARKET CRASHES: DOES DENSITY SPECIFICATION MATTER?

Esther Del Brio () and Javier Perote

Applied Econometrics and International Development, 2008, vol. 8, issue 1, 53-58

Abstract: The current research examines the capacity of the Edgeworth-Sargan density on forecasting market crashes. Focusing on the 1987 stock market crash the performance of this distribution is compared to the Student’s t concluding that the latter overestimates the risk. In contrast, and due to its flexible parametric structure, the Edgeworth-Sargan density is capable of more accurately forecasting the risk of highly volatile scenarios, especially when intraday data is available. We use daily data from the FTSE and Dow Jones indices (continuously compounded returns).

Keywords: Confidence intervals; Edgeworth-Sargan; Student’s t (search for similar items in EconPapers)
JEL-codes: C16 C53 G12 (search for similar items in EconPapers)
Date: 2008
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