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Extreme US stock market fluctuations in the wake of 9|11

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Author Info

  • S. T. M. Straetmans

    (Limburg Institute of Financial Economics (LIFE), Maastricht University, the Netherlands)

  • W. F. C. Verschoor

    (LIFE, Maastricht University and Radboud University Nijmegen, the Netherlands)

  • C. C. P. Wolff

    (LIFE, Maastricht University, The Netherlands; and CEPR, London, UK)

Abstract

We apply extreme value analysis to US sectoral stock indices in order to assess whether tail risk measures like value-at-risk and extremal linkages were significantly altered by 9|11. We test whether semi-parametric quantile estimates of 'downside risk' and 'upward potential' have increased after 9|11. The same methodology allows one to estimate probabilities of joint booms and busts for pairs of sectoral indices or for a sectoral index and a market portfolio. The latter probabilities measure the sectoral response to macro shocks during periods of financial stress (so-called 'tail-βs'). Taking 9|11 as the sample midpoint we find that tail-βs often increase in a statistically and economically significant way. This might be due to perceived risk of new terrorist attacks. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.973
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File URL: http://qed.econ.queensu.ca:80/jae/2008-v23.1/
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 23 (2008)
Issue (Month): 1 ()
Pages: 17-42

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Handle: RePEc:jae:japmet:v:23:y:2008:i:1:p:17-42

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  1. Ray Fair, 2003. "Events that Shook the Market," Yale School of Management Working Papers ysm307, Yale School of Management.
  2. Hartmann, P. & Straetmans, S. & De Vries, C.G., 2001. "Asset Market Linkages in Crisis Periods," Papers 71, Quebec a Montreal - Recherche en gestion.
  3. Jeffrey R. Brown & J. David Cummins & Christopher M. Lewis & Ran Wei, 2004. "An Empirical Analysis of the Economic Impact of Federal Terrorism Reinsurance," NBER Working Papers 10388, National Bureau of Economic Research, Inc.
  4. Quintos, Carmela & Fan, Zhenhong & Phillips, Peter C B, 2001. "Structural Change Tests in Tail Behaviour and the Asian Crisis," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 633-63, July.
  5. Jondeau, Eric & Rockinger, Michael, 2003. "Testing for differences in the tails of stock-market returns," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 559-581, December.
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  9. Drakos, Konstantinos, 2004. "Terrorism-induced structural shifts in financial risk: airline stocks in the aftermath of the September 11th terror attacks," European Journal of Political Economy, Elsevier, vol. 20(2), pages 435-446, June.
  10. Hartmann, Philipp & Straetmans, Stefan & de Vries, Casper, 2005. "Banking system stability: a cross-Atlantic perspective," Working Paper Series 0527, European Central Bank.
  11. Turan G. Bali, 2003. "An Extreme Value Approach to Estimating Volatility and Value at Risk," The Journal of Business, University of Chicago Press, vol. 76(1), pages 83-108, January.
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  17. Andersen, Torben G. & Bollerslev, Tim, 1997. "Intraday periodicity and volatility persistence in financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 115-158, June.
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Citations

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Cited by:
  1. Michel Beine & Pierre-Yves Preumont & Ariane Szafarz, 2006. "Sector diversification during crises: a European perspective," DULBEA Working Papers 06-07.RS, ULB -- Universite Libre de Bruxelles.
  2. Toni Gravelle & Fuchun Li, 2011. "Measuring Systemic Importance of Financial Institutions: An Extreme Value Theory Approach," Working Papers 11-19, Bank of Canada.
  3. Tolikas, Konstantinos, 2014. "Unexpected tails in risk measurement: Some international evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 476-493.
  4. Carsten Bormann & Melanie Schienle & Julia Schaumburg, 2014. "A Test for the Portion of Bivariate Dependence in Multivariate Tail Risk," Tinbergen Institute Discussion Papers 14-024/III, Tinbergen Institute.
  5. De Jonghe, Olivier, 2010. "Back to the basics in banking? A micro-analysis of banking system stability," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 387-417, July.
  6. Maarten R.C. van Oordt & Chen Zhou, 2011. "The simple econometrics of tail dependence," DNB Working Papers 296, Netherlands Central Bank, Research Department.
  7. Philipp Hartmann & Stefan Straetmans & Casper G. De Vries, 2005. "Banking System Stability: A Cross-Atlantic Perspective," NBER Working Papers 11698, National Bureau of Economic Research, Inc.
  8. Weiß, Gregor N.F. & Neumann, Sascha & Bostandzic, Denefa, 2014. "Systemic risk and bank consolidation: International evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 165-181.
  9. Straetmans, Stefan & Candelon, Bertrand, 2013. "Long-term asset tail risks in developed and emerging markets," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1832-1844.
  10. Amelia Pais & Philip A. Stork, 2013. "Short-Selling, Leverage and Systemic Risk," Tinbergen Institute Discussion Papers 13-186/IV/DSF68, Tinbergen Institute.

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