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Historical financial analogies of the current crisis

Author

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  • Andrada-Félix, Julián
  • Fernández-Rodríguez, Fernando
  • Sosvilla-Rivero, Simón

Abstract

This paper tries to shed light on the historical analogies of the current crisis. To that end we compare the current sample distribution of Dow Jones Industrial Average Index returns for a 769-day period (from 15 September 2008, the Lehman Brothers bankruptcy, to 30 September 2011), with all historical sample distributions of returns computed using a moving window of 769 days in the 2 January 1900 to 12 September 2008 period. Using a χ2 homogeneity test, we find that the stock market returns distribution during the current crisis would be similar to several past periods of severe financial crises that evolved into intense recessions, being the sub-sample from 22 September 1937 to 16 October 1940 the most analogous episode to the current situation. Furthermore, when applying the procedure proposed by Diebold et al. (1998) for comparing densities of sub-samples, we obtain additional support for our findings and discover a period from 18 September 1930 to 23 October 1933 where the severity of the crisis overcome the current situation having sharper tail events. Finally, when comparing historical market risk with the current risk, we observe that the current market risk has only been exceeded in the beginning of the Great Depression.

Suggested Citation

  • Andrada-Félix, Julián & Fernández-Rodríguez, Fernando & Sosvilla-Rivero, Simón, 2012. "Historical financial analogies of the current crisis," Economics Letters, Elsevier, vol. 116(2), pages 190-192.
  • Handle: RePEc:eee:ecolet:v:116:y:2012:i:2:p:190-192
    DOI: 10.1016/j.econlet.2012.02.015
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
    4. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-227, May.
    5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    6. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    7. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-883, November.
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    Cited by:

    1. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 188-199.

    More about this item

    Keywords

    Financial crisis; Great recession; Great depression;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G1 - Financial Economics - - General Financial Markets

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