Volatility, Information and Stock Market Crashes
AbstractIn this paper, we examine the evolution of the S&P500 returns volatility around market crashes using a Markov-Switching model. We find that volatility typically switches into the high volatility state well before a crash and remains in the high state for a considerable period of time after the crash. These results do not support the view that crashes are due to the resolution of uncertainty (e.g. Romer, 1993), but are consistent with the model in Frankel (2008) where the adaptive forecasts of volatility by uniformed traders result in a crash.
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Bibliographic InfoPaper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2009-18.
Length: 21 pages
Date of creation: Nov 2009
Date of revision:
Stock Market Crash; Volatility; Markov Switching;
Other versions of this item:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G0 - Financial Economics - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
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