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Extreme US stock market fluctuations in the wake of 9|11

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  • S. T. M. Straetmans

    (Limburg Institute of Financial Economics (LIFE), Maastricht University, the Netherlands)

  • W. F. C. Verschoor

    (LIFE, Maastricht University and Radboud University Nijmegen, the Netherlands)

  • C. C. P. Wolff

    (LIFE, Maastricht University, The Netherlands; and CEPR, London, UK)

Abstract

We apply extreme value analysis to US sectoral stock indices in order to assess whether tail risk measures like value-at-risk and extremal linkages were significantly altered by 9|11. We test whether semi-parametric quantile estimates of 'downside risk' and 'upward potential' have increased after 9|11. The same methodology allows one to estimate probabilities of joint booms and busts for pairs of sectoral indices or for a sectoral index and a market portfolio. The latter probabilities measure the sectoral response to macro shocks during periods of financial stress (so-called 'tail-βs'). Taking 9|11 as the sample midpoint we find that tail-βs often increase in a statistically and economically significant way. This might be due to perceived risk of new terrorist attacks. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • S. T. M. Straetmans & W. F. C. Verschoor & C. C. P. Wolff, 2008. "Extreme US stock market fluctuations in the wake of 9|11," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 17-42.
  • Handle: RePEc:jae:japmet:v:23:y:2008:i:1:p:17-42 DOI: 10.1002/jae.973
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    References listed on IDEAS

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