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Exploiting Spillovers to Forecast Crashes
Author(s) -
Gresnigt Francine,
Kole Erik,
Franses Philip Hans
Publication year - 2017
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2434
Subject(s) - spillover effect , econometrics , economics , us dollar , liberian dollar , asset (computer security) , exchange rate , computer science , monetary economics , finance , macroeconomics , computer security
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. Copyright © 2016 John Wiley & Sons, Ltd.