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Noncausal time series models for the forecasting of speculative bubbles

Objective

Speculative bubbles on financial markets, viewed as short-term explosive deviations of prices from a typical historical level and ending in an abrupt correction, have become common events across all major asset classes. They can have a dramatic impact on portfolio performances, financial institutions solvability and can compromise the stability of the financial system. Because of their ability to reproduce stylized facts from speculative bubbles such as locally explosive trajectories, noncausal time series models -autoregressive (AR) and moving average (MA) processes with roots located inside the unit circle- have been at the center of a recent fast-emerging literature in econometrics and finance. Provided their dynamics is better understood, they will enable to formulate forecasts of future bubble trajectories. If rapid progress is being achieved on estimation and fitting problematics, prediction theory of noncausal processes remains particularly scarce and limited to special elementary cases – mostly the univariate noncausal AR(1) with independent and identically distributed Cauchy errors.

The NONCAUSALBubble project aims at specifically addressing the lack of theoretical foundations for the forecasting of heavy-tailed noncausal processes. Building on recent tools from extreme value and alpha-stable distribution theories, NONCAUSALBubble will characterise the conditional distribution of future paths given the past observed trajectory during explosive episodes for 1) higher-order and 2) multivariate noncausal ARMA models. Closed-form formulations of the predictive distribution during bubble episodes will be derived alongside analytical quantification of the crash odds, and an intuitive prediction framework in terms of bubble pattern-recognition will be developed.

The project is hosted by VU Amsterdam, one of the top research groups in time series econometrics and forecasting.

Field of science

  • /social sciences/economics and business/economics/econometrics
  • /social sciences/economics and business/economics/macroeconomics
  • /natural sciences/computer and information sciences/artificial intelligence/pattern recognition

Call for proposal

H2020-MSCA-IF-2019
See other projects for this call

Funding Scheme

MSCA-IF-EF-ST - Standard EF

Coordinator

STICHTING VU
Address
De Boelelaan 1105
1081 HV Amsterdam
Netherlands
Activity type
Higher or Secondary Education Establishments
EU contribution
€ 187 572,48