Intelligent stock market instability index: Application to the Korean stock market

Abstract

In order to monitor stock market instability in emerging markets, we propose a stock market instability index (SMII) with a corresponding p-value by using a model fitted to a stable period. More precisely, this study considers a random walk model and combines it with a nonparametric model by using Bayesian model averaging. The integrated stock market instability index(iSMII) and its p$-value are derived as a posterior expectation of the two models. In this study, an artificial neural network (ANN) is utilized as a nonparametric model.