Short term prediction of extreme returns based on the recurrence interval analysis

DOI10.1080/14697688.2017.1373843zbMATH Open1400.91549arXiv1610.08230OpenAlexW2545771372WikidataQ57194311 ScholiaQ57194311MaRDI QIDQ4554428FDOQ4554428

Authors: Zhi-Qiang Jiang, Gang-Jin Wang, Askery Canabarro, Boris Podobnik, Chi Xie, Wei-Xing Zhou, H. Eugene Stanley 

Publication date: 14 November 2018

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: Being able to predict the occurrence of extreme returns is important in financial risk management. Using the distribution of recurrence intervals---the waiting time between consecutive extremes---we show that these extreme returns are predictable on the short term. Examining a range of different types of returns and thresholds we find that recurrence intervals follow a $q$-exponential distribution, which we then use to theoretically derive the hazard probability $W(Deltat|t)$. Maximizing the usefulness of extreme forecasts to define an optimized hazard threshold, we indicates a financial extreme occurring within the next day when the hazard probability is greater than the optimized threshold. Both in-sample tests and out-of-sample predictions indicate that these forecasts are more accurate than a benchmark that ignores the predictive signals. This recurrence interval finding deepens our understanding of reoccurring extreme returns and can be applied to forecast extremes in risk management.

Full work available at URL: https://arxiv.org/abs/1610.08230

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zbMATH Keywords

risk estimationrecurrence intervalreturn forecastingextreme returnhazard probability

Mathematics Subject Classification ID

Portfolio theory (91G10)

Cites Work

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Cited In (4)

• Recurrence Interval Analysis of Financial Time Series
• Extreme risk and fractal regularity in finance
• Exploring the attention mechanism in LSTM-based Hong Kong stock price movement prediction
• Early warning of large volatilities based on recurrence interval analysis in Chinese stock markets

Uses Software

• plfit

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