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Forecasting extreme trajectories using seminorm representations
Abstract
For (Xt) a two-sided α-stable moving average, this paper studies the conditional distribution of future paths given a piece of observed trajectory when the process is far from its central values. Under this framework, vectors of the form Xt = (Xt−m, . . . ,Xt,Xt+1, . . . ,Xt+h), m ≥ 0, h ≥ 1, are multivariate α-stable and the dependence between the past and future components is encoded in their spectral measures. A new representation of stable random vectors on unit cylinders sets {s ∈ Rm+h+1 : ∥s∥ = 1} for ∥ °§ ∥ an adequate seminorm is proposed to describe the tail behaviour of vectors Xt when only the first m + 1 components are assumed to be observed and large in norm. Not all stable vectors admit such a representation and (Xt) will have to be “anticipative enough” for Xt to admit one. The conditional distribution of future paths can then be explicitly derived using the regularly varying tails property of stable vectors and has a natural interpretation in terms of pattern identification. Through Monte Carlo simulations we develop procedures to forecast crash probabilities and crash dates and demonstrate their finite sample performances. As an empirical illustration, we estimate probabilities and reversal dates of El Nino and La Nina occurrences.
