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Time series analysis for financial market meltdowns

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

Abstract

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.

Suggested Citation

  • Young Shin Kim & Rachev, Svetlozar T. & Bianchi, Michele Leonardo & Mitov, Ivan & Fabozzi, Frank J., 2010. "Time series analysis for financial market meltdowns," Working Paper Series in Economics 2, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    • Handle: RePEc:zbw:kitwps:2
    DOI: 10.5445/IR/1000019771
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    1. 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 Management.
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    Keywords

    ARMA-GARCH model; »-stable distribution; tempered stable distribution; value-at-risk (VaR); average value-at-risk (AVaR);
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