2T-POT Hawkes model for left- and right-tail conditional quantile forecasts of financial log returns: Out-of-sample comparison of conditional EVT models

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

International Journal of Forecasting, 2024, vol. 40, issue 1, 324-347

Abstract: Conditional extreme value theory (EVT) methods promise enhanced forecasting of the extreme tail events that often dominate systemic risk. We present an improved two-tailed peaks-over-threshold (2T-POT) Hawkes model that is adapted for conditional quantile forecasting in both the left and right tails of a univariate time series. This is applied to the daily log returns of six large-cap indices. We also take the unique step of fitting the model at multiple exceedance thresholds (from the 1.25% to 25.00% mirrored quantiles). Quantitatively similar asymmetries in Hawkes parameters are found across all six indices, adding further empirical support to a temporal leverage effect in financial price time series in which the impact of losses is not only larger but also more immediate. Out-of-sample backtests find that our 2T-POT Hawkes model is more reliably accurate than the GARCH-EVT model when forecasting (mirrored) value at risk and expected shortfall at the 5% coverage level and below. This suggests that asymmetric Hawkes-type arrival dynamics are a better approximation of the true generating process for extreme daily log returns than GARCH-type conditional volatility. Our 2T-POT Hawkes model therefore presents a better-performing alternative for financial risk modelling.

Keywords: Hawkes processes; GARCH-EVT; Conditional extreme value theory; Value at risk; Expected shortfall; Leverage effect (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:40:y:2024:i:1:p:324-347

DOI: 10.1016/j.ijforecast.2023.03.003

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