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

  • 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)

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.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 23 (2008)
Issue (Month): 1 ()
Pages: 17-42

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Handle: RePEc:jae:japmet:v:23:y:2008:i:1:p:17-42
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