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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.

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File URL: http://128.118.178.162/eps/fin/papers/0501/0501015.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0501015.

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Length: 42 pages
Date of creation: 31 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0501015

Note: Type of Document - pdf; pages: 42
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Web page: http://128.118.178.162

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Keywords: stock-market crash; mean reversion; stock return predictability; change-points;

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