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Forecasting Market Crashes: Does Density Specification Matter?

  • BRIO, Esther B.

    ()

  • PEROTE, Javier

    ()

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).

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Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 8 (2008)
Issue (Month): 1 ()
Pages: 53-58

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Handle: RePEc:eaa:aeinde:v:8:y:2008:i:1_4
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  1. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
  2. Attanasio, Orazio P, 1991. "Risk, Time-Varying Second Moments and Market Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 479-94, May.
  3. Balvers, Ronald J & Cosimano, Thomas F & McDonald, Bill, 1990. " Predicting Stock Returns in an Efficient Market," Journal of Finance, American Finance Association, vol. 45(4), pages 1109-28, September.
  4. Nabeel Al-Loughani & David Chappell, 1997. "On the validity of the weak-form efficient markets hypothesis applied to the London stock exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 7(2), pages 173-176.
  5. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  6. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
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