Using a parsimonious autoregressive process with long-range. memory defined on the logarithm of the volatility, we predict strikingly different response functions of the volatility to external shocks compared with endogenous shocks. These predictions are validated empirically on data from a hierarchy of volatility shocks, on major crashes and finally on major external disturbances such as the events of Sept. 11, 2001 and the coup against Gorbachev on Aug., 19, 1991. Our theory allows us to classify unambiguously these different events in two classes (endogenous and exogenous) with specific signatures for both and characteristic precursors for the endogenous class. It also explains the origin of endogenous shocks as the coherent accumulations of tiny bad news, and thus unify all previous explanations of large crashes including Oct. 1987.
- Multifractal random walk
- volatility persistence
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Sornette, D., Malevergne, Y., Muzy, JF. (2004). Volatility Fingerprints of Large Shocks: Endogenous Versus Exogenous. In: Takayasu, H. (eds) The Application of Econophysics. Springer, Tokyo. https://doi.org/10.1007/978-4-431-53947-6_12
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