Abstract
We propose a model to capture the dynamics of asset returns, with periods of crises that are characterized by contagion. In the model, a jump in one region of the world increases the intensity of jumps both in the same region (self-excitation) as well as in other regions (cross-excitation), generating episodes of highly clustered jumps across world markets that mimic the observed features of the data. We develop and implement moment-based estimation and testing procedures for this model. The estimates provide evidence of self-excitation both in the US and the other world markets, and of asymmetric cross-excitation, with the US market typically having more influence on the jump intensity of other markets than the reverse. We propose filtered values of the jump intensities as a measure of market stress and examine their out-of-sample forecasting abilities.
Original language | English (US) |
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Pages (from-to) | 585-606 |
Number of pages | 22 |
Journal | Journal of Financial Economics |
Volume | 117 |
Issue number | 3 |
DOIs | |
State | Published - Sep 1 2015 |
All Science Journal Classification (ASJC) codes
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management
Keywords
- Contagion
- Crisis
- Hawkes process
- Jumps
- Self- and mutually exciting processes