Mathematicians at HSE have successfully demonstrated the use of a Japanese model which detects seismic activity in predicting currency risks. The research results have been published in an article entitled Hawkes Processes for Forecasting Currency Crashes: Evidence from Russia.
The ETAS (Epidemic-type Aftershock Sequence) approach was developed in Japan in 1988 by Ogata. This model is based on Hawkes self-exciting processes and enables scientists to calculate the probability of further seismic activity, based on the first shocks.
This idea of self-excitement shares some similarities with the cause-and-effect relationships of sudden changes on the financial market.
Jumps on the foreign exchange market or on the stock market always stem from external (exogenous) or internal (endogenous) causes. As a rule, external causes are not predictable, but they can have a strong impact on the stock exchange. For example, this happened on the first trading day after the attacks of September 11, 2001, when the Dow Jones index dropped by 7.1%.
Read more at National Research University Higher School of Economics
