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Volatility Information And Stock Market Crashes

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  • Nikolaos Antonakakis
  • Johann Scharler

Abstract

In this paper we examine the evolution of the SP500 returns volatility around market crashes using a Markov Switching model We find that volatility typically switches into the high volatility state well before a crash and remains in the high state for a considerable period of time after the crash These results do not support the view that crashes are due to the resolution of uncertainty e g Romer 1993 but are consistent with the model in Frankel 2008 where the adaptive forecasts of volatility by uniformed traders result in a crash

Suggested Citation

  • Nikolaos Antonakakis & Johann Scharler, 2012. "Volatility Information And Stock Market Crashes," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 3(1), pages 49-57.
    • Handle: RePEc:srs:jasf00:v:3:y:2012:i:1:p:49-57
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    References listed on IDEAS

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    1. 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 379-395, June.
    2. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    3. Nick Bloom, 2007. "Uncertainty and the Dynamics of R&D," American Economic Review, American Economic Association, vol. 97(2), pages 250-255, May.
    4. David M. Frankel, 2008. "Adaptive Expectations And Stock Market Crashes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 595-619, May.
    5. Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," The Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
    6. Christina D. Romer, 1990. "The Great Crash and the Onset of the Great Depression," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 597-624.
    7. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
    8. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    9. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 391-415.
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G0 - Financial Economics - - General

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