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Measuring the Stability of a Dynamic System: The Case of the Stock Market Turmoil 2007-2008

Author

Listed:
  • Bask, Mikael

    (Department of Economics)

  • Widerberg, Anna

    (Department of Economics Göteborg University)

Abstract

The aim of this paper is to demonstrate how the change in actual and potential market risks in the Dow Jones Industrial Average (DJIA) during the two-year period 2007-2008 can be analyzed with the help of (lambda,sigma-2)-analysis. In the empirical analysis, the average of the Lyapunov exponents for the dynamic system generating DJIA returns is used as the stability measure, lambda, whereas the squared DJIA return is used as the variability measure, sigma-2. The main findings are as follows: (i) the potential market risk in the DJIA did not fluctuate that much during 2007, with the exceptions of early fall and near the end of the year; (ii) the potential market risk fluctuated a lot during 2008, especially in early August and in the middle of September; and (iii) the actual market risk in the DJIA was considerably higher near the end of 2008, especially in October, compared with the rest of the period.

Suggested Citation

  • Bask, Mikael & Widerberg, Anna, 2010. "Measuring the Stability of a Dynamic System: The Case of the Stock Market Turmoil 2007-2008," Working Paper Series 2010:25, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uunewp:2010_025
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    More about this item

    Keywords

    Dow Jones; Financial Crisis; Lyapunov Exponents; Market Risk; Potential Market Risk; Stability; Volatility;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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