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Is Volatility the Best Predictor of Market Crashes?

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  • Chikashi Tsuji

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    Abstract

    The objective of this paper is to determine the best predictor of equity market crashes by focusing particularly on volatility and market liquidity. In finance, volatility has traditionally been regarded as the best measure of market risk. However, this paper shows that the forecast value of market liquidity, in particular our modified calculated market depth, predicts equity market crashes much more accurately than does the forecast values of EGARCH or Implied Volatility. Copyright Springer Science + Business Media, Inc. 2003

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    File URL: http://hdl.handle.net/10.1007/s10690-005-6009-x
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    Bibliographic Info

    Article provided by Springer in its journal Asia-Pacific Financial Markets.

    Volume (Year): 10 (2003)
    Issue (Month): 2 (September)
    Pages: 163-185

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    Handle: RePEc:kap:apfinm:v:10:y:2003:i:2:p:163-185

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    Web page: http://springerlink.metapress.com/link.asp?id=102851

    Related research

    Keywords: leverage effect; market clearing function; market crash; market liquidity; price-adjustment function; time-varying risk premiums theory; Value at Risk;

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