Early warning signs of financial market turmoils
- Volatility clustering and fat tails are prominently observed in financial markets. Here, we analyze the underlying mechanisms of three agent-based models explaining these stylized facts in terms of market instabilities and compare them on empirical grounds. To this end, we first develop a general framework for detecting tail events in stock markets. In particular, we introduce Hawkes processes to automatically identify and date onsets of market turmoils which result in increased volatility. Second, we introduce three different indicators to predict those onsets. Each of the three indicators is derived from and tailored to one of the models, namely quantifying information content, critical slowing down or market risk perception. Finally, we apply our indicators to simulated and real market data. We find that all indicators reliably predict market events on simulated data and clearly distinguish the different models. In contrast, a systematic comparison on the stocks of the Forbes 500 companies shows a markedly lower performance. Overall, predicting the onset of market turmoils appears difficult, yet, over very short time horizons high or rising volatility exhibits some predictive power.
Author: | Nils BertschingerORCiDGND, Oliver Pfante |
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URN: | urn:nbn:de:hebis:30:3-565216 |
DOI: | https://doi.org/10.3390/jrfm13120301 |
ISSN: | 1911-8074 |
ISSN: | 1911-8066 |
Parent Title (German): | Journal of Risk and Financial Management |
Publisher: | MDPI |
Place of publication: | Basel |
Document Type: | Article |
Language: | English |
Date of Publication (online): | 2020/11/30 |
Date of first Publication: | 2020/11/30 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2020/12/06 |
Tag: | agent-based modeling; early warning signs; hawkes processes; volatility clustering |
Volume: | 13 |
Issue: | 301 |
Page Number: | 24 |
HeBIS-PPN: | 476661145 |
Institutes: | Informatik und Mathematik / Informatik |
Wissenschaftliche Zentren und koordinierte Programme / Frankfurt Institute for Advanced Studies (FIAS) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Creative Commons - Namensnennung 4.0 |