Detail publikace

Realizing stock market crashes: Stochastic cusp catastrophe model of returns under the time-varying volatility

Autor: doc. PhDr. Jozef Baruník Ph.D.,
PhDr. Jiří Kukačka Ph.D.,
Typ: IES Working Papers
Rok: 2013
Číslo: 19
Publikováno v: IES Working Papers 19/2013, published in QUANT FINANC
Místo vydání: Prague
Klíčová slova: stochastic cusp catastrophe model, realized volatility, bifurcations, stock market crash
JEL kódy: C01, C53
Granty: GAUK 588912 - Empirická validace modelů s heterogenními agenty SVV 267 504: Intensification of Doctoral Research in Economics and Finance: Extending Alternative Approaches to Economic Models
Abstrakt: This paper develops a two-step estimation methodology, which allows us to apply catastrophe theory to stock market returns with time-varying volatility and model stock market crashes. Utilizing high frequency data, we estimate the daily realized volatility from the returns in the first step and use stochastic cusp catastrophe on data normalized by the estimated volatility in the second step to study possible discontinuities in markets. We support our methodology by simulations where we also discuss the importance of stochastic noise and volatility in deterministic cusp catastrophe model. The methodology is empirically tested on almost 27 years of U.S. stock market evolution covering several important recessions and crisis periods. Due to the very long sample period we also develop a rolling estimation approach and we find that while in the first half of the period stock markets showed marks of bifurcations, in the second half catastrophe theory was not able to confirm this behavior. Results suggest that the proposed methodology provides an important shift in application of catastrophe theory to stock markets.
Ke stažení: WP_2013_19_Barunik_Kukacka




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