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Forecasting Market Crashes: Does Density Specification Matter?

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  • BRIO, Esther B.

  • PEROTE, Javier

Abstract

The current research examines the capacity of the Edgeworth-Sargan density on forecasting market crashes. Focusing on the 1987 stock market crash the performance of this distribution is compared to the Student’s t concluding that the latter overestimates the risk. In contrast, and due to its flexible parametric structure, the Edgeworth-Sargan density is capable of more accurately forecasting the risk of highly volatile scenarios, especially when intraday data is available. We use daily data from the FTSE and Dow Jones indices (continuously compounded returns).

Suggested Citation

  • BRIO, Esther B. & PEROTE, Javier, 2008. "Forecasting Market Crashes: Does Density Specification Matter?," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 8(1), pages 53-58.
    • Handle: RePEc:eaa:aeinde:v:8:y:2008:i:1_4
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    References listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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