Asia-Pacific Financial Markets

, Volume 10, Issue 2–3, pp 163–185

Is Volatility the Best Predictor of Market Crashes?



The objective of this paper is to determine the best predictor of equity market crashes by focusing particularly on volatility and market liquidity. In finance, volatility has traditionally been regarded as the best measure of market risk. However, this paper shows that the forecast value of market liquidity, in particular our modified calculated market depth, predicts equity market crashes much more accurately than does the forecast values of EGARCH or Implied Volatility.

Key words

leverage effect market clearing function market crash market liquidity price-adjustment function time-varying risk premiums theory Value at Risk 


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Copyright information

© Springer Science + Business Media, Inc. 2005

Authors and Affiliations

  1. 1.Faculty of Business AdministrationRitsumeikan UniversityShigaJapan

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