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Fads and the Crash of '87

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  • Chowdhury, Mustafa
  • Lin, Ji-Chai

Abstract

This paper examines changes in return-generating processes before and after the crash of '87. We find that the process for daily returns of size-sorted portfolios changed from an ARMA (1, 2) in the pre-crash period to a MA(1) in the post-crash period. The change is explained by a "fads" model similar to that proposed by Poterba and Summers. The analysis suggests that the crash may have been related to speculative fads that prevailed prior to the crash. The fads component in stock prices then disappeared after the crash. Other possible explanations are also discussed. Copyright 1993 by MIT Press.

Suggested Citation

  • Chowdhury, Mustafa & Lin, Ji-Chai, 1993. "Fads and the Crash of '87," The Financial Review, Eastern Finance Association, vol. 28(3), pages 385-401, August.
    • Handle: RePEc:bla:finrev:v:28:y:1993:i:3:p:385-401
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    Cited by:

    1. Durand, Robert B. & Koh, Shern-Wei & Ng, Hock Guan, 2003. "From gold to silicon," Journal of Multinational Financial Management, Elsevier, vol. 13(3), pages 273-286, July.
    2. Jeetendra Dangol, 2008. "Unanticipated Political Events and Stock Returns: An Event Study," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 20, pages 86-110, April.
    3. Joe Brocato & Kenneth Smith, 2012. "Sudden equity price declines and the flight-to-safety phenomenon: additional evidence using daily data," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(3), pages 712-727, July.
    4. Koutmos, Gregory, 1998. "Asymmetries in the Conditional Mean and the Conditional Variance: Evidence From Nine Stock Markets," Journal of Economics and Business, Elsevier, vol. 50(3), pages 277-290, May.
    5. Thomas Zorn & Donna Dudney & Benjamas Jirasakuldech, 2009. "P|E changes: some new results," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(4), pages 358-370.

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