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Mean Reversion Expectations and the 1987 Stock Market Crash: An Empirical Investigation

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  • Eric Hillebrand

    (Louisiana State University, Department of Economics)

Abstract

After the stock market crash of 1987, Fischer Black proposed a model in which he explained the crash by inconsistencies in the formation of expectations of mean reversion in stock returns. Following this explanation, a model that allows for mean reversion in stock returns is estimated on daily stock index data around the crash of 1987. The results strongly support Black’s hypothesis. Simulations show that on Friday Oct 16, 1987, a crash of 20 percent or more had a probability of more than seven percent.

Suggested Citation

  • Eric Hillebrand, 2005. "Mean Reversion Expectations and the 1987 Stock Market Crash: An Empirical Investigation," Finance 0501015, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0501015
    Note: Type of Document - pdf; pages: 42
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    References listed on IDEAS

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    More about this item

    Keywords

    stock-market crash; mean reversion; stock return predictability; change-points;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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