Volatility, Information And Stock Market Crashes
In this paper, we examine the evolution of the S&P500 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.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Zeira, Joseph, 1993.
"Informational Overshooting, Booms and Crashes,"
CEPR Discussion Papers
823, C.E.P.R. Discussion Papers.
- Nicholas Bloom, 2007.
"Uncertainty and the Dynamics of R&D,"
07-021, Stanford Institute for Economic Policy Research.
- Nicholas Bloom, 2007. "Uncertainty and the Dynamics of R&D," NBER Working Papers 12841, National Bureau of Economic Research, Inc.
- Nick Bloom, 2007. "Uncertainty and the dynamics of R&D," LSE Research Online Documents on Economics 19724, London School of Economics and Political Science, LSE Library.
- Nick Bloom, 2007. "Uncertainty and the Dynamics of R&D," CEP Discussion Papers dp0792, Centre for Economic Performance, LSE.
- 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, 05.
- Frankel, David M., 2008. "Adaptive Expectations and Stock Market Crashes," Staff General Research Papers 31688, Iowa State University, Department of Economics.
- Dilip Abreu & Markus K. Brunnermeier, 2003.
"Bubbles and Crashes,"
Econometric Society, vol. 71(1), pages 173-204, January.
- Schwert, G.W., 1989.
"Stock Volatility And The Crash Of '87,"
89-01, Rochester, Business - General.
- Nicholas Bloom, 2007.
"The Impact of Uncertainty Shocks,"
NBER Working Papers
13385, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:srs:jasf12:4:v:3:y:2012:i:1:p:49-67. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Laura Stefanescu)
If references are entirely missing, you can add them using this form.