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Trading Behavior During Stock Market Downturns: The Dow, 1915 - 2004

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  • Siklos, Pierre L.
  • Bohl, Martin T.

Abstract

Stock markets periodically experience sharp falls with some referred to as outright crashes. The extant literature has generally resorted to survey type evidence to determine the behavior of investors during such episodes. These kind of studies come to the conclusion that fundamentals play little role in explaining sharp stock market downturns as in October 1987. We know of no econometric study that asks whether feedback, momentum or trend chasing type behavior might explain the behavior of large stock market downturns. Resorting to a feedback trader model, we estimate a variety of asymmetric GARCH-type models. Based on daily data on the Dow Jones Industrial Average index since 1915 we find that there is evidence of positive feedback trading during episodes of stock market crashes. Hence, the econometric evidence is broadly consistent with findings based on surveys. --

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Paper provided by European University Viadrina Frankfurt (Oder), The Postgraduate Research Programme Capital Markets and Finance in the Enlarged Europe in its series Working Paper Series with number 2005,7.

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Date of creation: 2005
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Handle: RePEc:zbw:euvgra:20057

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  1. Robert J. Shiller & Fumiko Konya & Yoshiro Tsutsui, 1988. "Investor Behavior in the October 1987 Stock Market Crash: The Case of Japan," NBER Working Papers 2684, National Bureau of Economic Research, Inc.
  2. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1992. "Trading Volume and Serial Correlation in Stock Returns," NBER Working Papers 4193, National Bureau of Economic Research, Inc.
  3. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
  4. Mech, Timothy S., 1993. "Portfolio return autocorrelation," Journal of Financial Economics, Elsevier, vol. 34(3), pages 307-344, December.
  5. repec:att:wimass:9002 is not listed on IDEAS
  6. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Cowles Foundation Discussion Papers 719R, Cowles Foundation for Research in Economics, Yale University.
  7. Gregory Koutmos & Reza Saidi, 2001. "Positive feedback trading in emerging capital markets," Applied Financial Economics, Taylor & Francis Journals, vol. 11(3), pages 291-297.
  8. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
  9. Koutmos, Gregory, 1997. "Feedback trading and the autocorrelation pattern of stock returns: further empirical evidence," Journal of International Money and Finance, Elsevier, vol. 16(4), pages 625-636, August.
  10. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  11. Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," The Journal of Business, University of Chicago Press, vol. 61(4), pages 409-25, October.
  12. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 457-510.
  13. Sentana, Enrique & Wadhwani, Sushil B, 1992. "Feedback Traders and Stock Return Autocorrelations: Evidence from a Century of Daily Data," Economic Journal, Royal Economic Society, vol. 102(411), pages 415-25, March.
  14. LeBaron, Blake, 1992. "Some Relations between Volatility and Serial Correlations in Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 65(2), pages 199-219, April.
  15. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
  16. Robert J. Shiller, 1987. "Investor Behavior in the October 1987 Stock Market Crash: Survey Evidence," NBER Working Papers 2446, National Bureau of Economic Research, Inc.
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