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Time series analysis for financial market meltdowns

  • Young Shin Kim
  • Rachev, Svetlozar T.
  • Bianchi, Michele Leonardo
  • Mitov, Ivan
  • Fabozzi, Frank J.

There appears to be a consensus that the recent instability in global financial markets may be attributable in part to the failure of financial modeling. More specifically, current risk models have failed to properly assess the risks associated with large adverse stock price behavior. In this paper, we first discuss the limitations of classical time series models for forecasting financial market meltdowns. Then we set forth a framework capable of forecasting both extreme events and highly volatile markets. Based on the empirical evidence presented in this paper, our framework offers an improvement over prevailing models for evaluating stock market risk exposure during distressed market periods.

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Paper provided by Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering in its series Working Paper Series in Economics with number 2.

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Date of creation: 2010
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Handle: RePEc:zbw:kitwps:2
Contact details of provider: Web page: http://www.wiwi.kit.edu/

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  1. Shin Kim, Young & Rachev, Svetlozar T. & Leonardo Bianchi, Michele & Fabozzi, Frank J., 2010. "Tempered stable and tempered infinitely divisible GARCH models," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2096-2109, September.
  2. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  3. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
  4. Bedendo, Mascia & Campolongo, Francesca & Joossens, Elisabeth & Saita, Francesco, 2010. "Pricing multiasset equity options: How relevant is the dependence function?," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 788-801, April.
  5. Bianchi, Michele Leonardo & Rachev, Svetlozar T. & Kim, Young Shin & Fabozzi, Frank J., 2011. "Tempered infinitely divisible distributions and processes," Working Paper Series in Economics 26, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
  6. Berkowitz, Jeremy, 2001. "Testing Density Forecasts, with Applications to Risk Management," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 465-74, October.
  7. Carlo Marinelli & Stefano D'Addona & Svetlozar T. Rachev, 2007. "A Comparison Of Some Univariate Models For Value-At-Risk And Expected Shortfall," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(06), pages 1043-1075.
  8. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  9. Gupta, Anurag & Liang, Bing, 2005. "Do hedge funds have enough capital? A value-at-risk approach," Journal of Financial Economics, Elsevier, vol. 77(1), pages 219-253, July.
  10. Young Kim & Svetlozar Rachev & Michele Bianchi & Frank Fabozzi, 2009. "Computing VAR and AVaR in Infinitely Divisible Distributions," Yale School of Management Working Papers amz2569, Yale School of Management.
  11. Turan G. Bali, 2007. "A Generalized Extreme Value Approach to Financial Risk Measurement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1613-1649, October.
  12. Turan G. Bali, 2003. "An Extreme Value Approach to Estimating Volatility and Value at Risk," The Journal of Business, University of Chicago Press, vol. 76(1), pages 83-108, January.
  13. Sorwar, Ghulam & Dowd, Kevin, 2010. "Estimating financial risk measures for options," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1982-1992, August.
  14. Kim, Young Shin & Rachev, Svetlozar T. & Bianchi, Michele Leonardo & Fabozzi, Frank J., 2008. "Financial market models with Lévy processes and time-varying volatility," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1363-1378, July.
  15. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
  16. Fajardo, José & Farias, Aquiles, 2010. "Derivative pricing using multivariate affine generalized hyperbolic distributions," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1607-1617, July.
  17. repec:spr:compst:v:69:y:2009:i:3:p:411-438 is not listed on IDEAS
  18. Peter Carr & Helyette Geman, 2002. "The Fine Structure of Asset Returns: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 75(2), pages 305-332, April.
  19. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
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