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Historical financial analogies of the current crisis

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Author Info

  • Julián Andrada-Félix

    (Universidad de Las Palmas de Gran Canaria, Spain)

  • Fernando Fernández-Rodríguez

    (Universidad de Las Palmas de Gran Canaria, Spain)

  • Simón Sosvilla-Rivero

    (Universidad Complutense de Madrid, Spain)

Abstract

This paper tries to shed light on the historical analogies of the current crisis. To that end we compare the current sample distribution of Dow Jones Industrial Average Index returns for a 769-day period (from 15 September 2008, the Lehman Brothers bankruptcy, to September 2011), with all historical sample distributions of returns computed with a moving window of 769 days in the 2 January 1900 to 12 September 2008 period. Using a Kolmogorov-Smirnov and a x2 homogeneity tests which have the null hypothesis of equal distribution we find that the stock market returns distribution during the current crisis would be similar to several past periods of severe financial crises that evolved into intense recessions, being the sub-sample from 28 May 1935 to 17 Jun 1938 the most analogous episode to the current situation. Furthermore, when applying the procedure proposed by Diebold, Gunther and Tay (1998) for comparing densities of sub-samples, we obtain additional support for our findings and discover a period from 10 September 1930 to 13 October 1933 where the severity of the crisis overcomes the current situation having sharper tail events. Finally, when comparing historical market risk with the current risk, we observe that the current market risk has only been exceeded at the beginning of the Great Depression.

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File URL: http://www.aeefi.com/RePEc/pdf/defi11-08.pdf
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Bibliographic Info

Paper provided by Asociación Española de Economía y Finanzas Internacionales in its series Working Papers with number 11-08.

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Length: 19 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:aee:wpaper:1108

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Keywords: Financial crisis; Great Recession; Great Depression;

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  1. Sanford J. Grossman & Robert J. Shiller, 1980. "The Determinants of the Variability of Stock Market Prices," NBER Working Papers 0564, National Bureau of Economic Research, Inc.
  2. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
  3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  5. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  6. Reinhart, Carmen & Rogoff, Kenneth, 2009. "The Aftermath of Financial Crises," CEPR Discussion Papers 7209, C.E.P.R. Discussion Papers.
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Cited by:
  1. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 188-199.

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