Circuit Breakers and the Tail Index of Equity Returns
AbstractUsing the tail index of returns on U.S. equities as a summary measure of extreme behavior, we examine changes in the equity markets surrounding the development of program trading for portfolio insurance, the crash of 1987, and the subsequent introduction of circuit breakers and other changes in market architecture. Recently-developed tests for the null of constancy of the tail index, versus the alternative of a change at an unknown date, permit inference on changes in extreme behavior over a long time period while allowing for second-moment dependence in the return data. We find strong evidence of a decrease in the tail index (increase in the probability of extreme events) around the beginning of large-scale program trading, and weaker, but still substantial, evidence of further significant change in the tail index following the introduction of circuit breakers. Point estimates of the tail index suggest that the tail index may have roughly regained pre-program trading levels. More generally, the results tend to suggest that long samples of U.S. equity returns should not be treated as samples from a single distribution function, particularly in examining extremes. Copyright 2004, Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.
Volume (Year): 2 (2004)
Issue (Month): 1 ()
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Other versions of this item:
- John Galbraith & Serguei Zernov, 2002. "Circuit Breakers and the Tail Index of Equity Returns," CIRANO Working Papers 2002s-62, CIRANO.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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- G. Booth & John Broussard, 1998. "Setting NYSE Circuit Breaker Triggers," Journal of Financial Services Research, Springer, vol. 13(3), pages 187-204, June.
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- 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.
- Wagner, Niklas, 2005. "Autoregressive conditional tail behavior and results on Government bond yield spreads," International Review of Financial Analysis, Elsevier, vol. 14(2), pages 247-261.
- John G. Galbraith & Serguei Zernov, 2006. "Extreme Dependence In The Nasdaq And S&P Composite Indexes," Departmental Working Papers 2006-14, McGill University, Department of Economics.
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