Forecasting market crashes: Does density specification matter?

• DEL BRIO, Esther B. ^[1] ; PEROTE, Javier ^[2]
  1. [1] Universidad de Salamanca

     Universidad de Salamanca

     Salamanca, España

     
  2. [2] Rey Juan Carlos University,
• Localización: Applied econometrics and international development, ISSN 1578-4487, Vol. 8, Nº. 1, 2008, págs. 53-58
• Idioma: inglés
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• Resumen

  • 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 and hourly data from the FTSE and Dow Jones indices.