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Exploiting Spillovers to forecast Crashes

Francine Gresnigt, Erik Kole () and Philip Hans Franses
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Francine Gresnigt: Erasmus University Rotterdam

No 15-118/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

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 (search for similar items in EconPapers)
JEL-codes: G01 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for
Date: 2015-10-23
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Journal Article: Exploiting Spillovers to Forecast Crashes (2017) Downloads
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