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Stock Returns and Roughness Extreme Variations: A New Model for Monitoring 2008 Market Crash and 2015 Flash Crash

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  • Abootaleb Shirvani

Abstract

We use Student’s t-copula to study the extreme variations in the bivariate kinematic time series of log–return and log–roughness of the S&P 500 index during two market crashes, the financial crisis in 2008 and the flash crash on Monday August 24, 2015. The stable and small values of the tail dependence index observed for some months preceding the market crash of 2008 indicate that the joint distribution of daily return and roughness was close to a normal one. The volatility of the tail and degree of freedom indices as determined by Student’s t-copula falls down substantially after the stock market crash of 2008. The number of degrees of freedom in the empirically observed distributions falls while the tail coefficient of the copula increases, indicating the long memory effect of the market crash of 2008. A significant change in the tail and degree of freedom indices associated with the intraday price of S&P 500 index is observed before, during, and after the flash crash on August 24, 2015. The long memory effect of the stock market flash crash of August 2015 is indicated by the number of degrees of freedom in the empirically observed distributions fall while the tail coefficient of the joint distribution increases after the flash crash. The small and stable value of degrees of freedom preceding the flash crash provides evidence that the joint distribution for intraday data of return and roughness is heavy-tailed. Time-varying long-range dependence in mean and volatility as well as the Chow and Bai-Perron tests indicate non-stability of the stock market in this period.

Suggested Citation

  • Abootaleb Shirvani, 2020. "Stock Returns and Roughness Extreme Variations: A New Model for Monitoring 2008 Market Crash and 2015 Flash Crash," Applied Economics and Finance, Redfame publishing, vol. 7(3), pages 78-95, May.
    • Handle: RePEc:rfa:aefjnl:v:7:y:2020:i:3:p:78-95
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    References listed on IDEAS

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    2. Javad Shaabani & Ali Akbar Jafari, 2020. "A New Look to Three-Factor Fama-French Regression Model using Sample Innovations," Papers 2006.02467, arXiv.org.

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    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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