Exploiting Spillovers to Forecast Crashes

Francine Gresnigt, Erik Kole, Philip Hans Franses

Research output: Contribution to journalArticleAcademicpeer-review

6 Citations (Scopus)

Abstract

We develop Hawkes models in which events are triggered through self-excitation 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. We predict the probability of crashes in the series and the value at risk (VaR) over a period that includes the financial crisis of 2008 using a moving window. A Lagrange multiplier test suggests the presence of cross-excitation for these series. Out-of-sample, we find that the models that include spillover effects forecast crashes and the VaR significantly more accurately than the models without these effects.
Original languageEnglish
Pages (from-to)936-955
Number of pages20
JournalJournal of Forecasting
Volume36
Issue number8
Early online date13 Jun 2016
DOIs
Publication statusPublished - 18 Aug 2016

Research programs

  • EUR ESE 31

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