Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2015-10-23
Number: 15-118/III
Author-Name: Francine Gresnigt
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Erik Kole
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Philip Hans Franses
Author-Workplace-Name: Erasmus University Rotterdam, the Netherlands
Title: Exploiting Spillovers to forecast Crashes
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.
Classification-JEL: G01, G17
Keywords: Hawkes processes, extremal dependence, Value-at-Risk, financial crashes, spillover
File-Url: https://papers.tinbergen.nl/15118.pdf
File-Format: application/pdf
File-Size: 1826674 bytes
Handle: RePEc:tin:wpaper:20150118