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Volatility, Information and Stock Market Crashes

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  • Nikolaos Antonakakis
  • Johann Scharler

Abstract

In 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 Info

Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2009-18.

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Length: 21 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:jku:econwp:2009_18

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Keywords: Stock Market Crash; Volatility; Markov Switching;

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  1. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
  2. G. William Schwert, 1990. "Stock Volatility and the Crash of '87," NBER Working Papers 2954, National Bureau of Economic Research, Inc.
  3. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  4. Nick Bloom, 2007. "Uncertainty and the Dynamics of R&D," CEP Discussion Papers dp0792, Centre for Economic Performance, LSE.
  5. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  6. David M. Frankel, 2008. "Adaptive Expectations And Stock Market Crashes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 595-619, 05.
  7. Frankel, David M., 2008. "Adaptive Expectations and Stock Market Crashes," Staff General Research Papers 31688, Iowa State University, Department of Economics.
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