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

DOI10.1080/14697688.2017.1373843MaRDI QIDQ4554428zbMATH OpenOpenAlexWikidataFDO

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)

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

zbMATH Keywords

risk estimationrecurrence intervalreturn forecastingextreme returnhazard probability

Mathematics Subject Classification ID

Portfolio theory (91G10)

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.

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Cited in

(4)

• Extreme risk and fractal regularity in finance
• Recurrence Interval Analysis of Financial Time Series
• 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

Describes a project that uses

Uses Software

• plfit

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