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Volatility, Information And Stock Market Crashes

  • Nikolaos Antonakakis

    ()

    (Department of Economics, Vienna University of Economics and Business, Austria)

  • Johann Scharler

    ()

    (Department of Economics, University of Innsbruck, Austria)

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.

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Article provided by ASERS Publishing in its journal Journal of Advanced Studies in Finance.

Volume (Year): III (2012)
Issue (Month): 1 (June)
Pages: 49-67

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Handle: RePEc:srs:jasf12:4:v:3:y:2012:i:1:p:49-67
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  1. Dilip Abreu & Markus K. Brunnermeier, 2002. "Bubbles and crashes," LSE Research Online Documents on Economics 24905, London School of Economics and Political Science, LSE Library.
  2. 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.
  3. Schwert, G William, 1990. "Stock Volatility and the Crash of '87," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 77-102.
  4. Zeira, Joseph, 1993. "Informational Overshooting, Booms and Crashes," CEPR Discussion Papers 823, C.E.P.R. Discussion Papers.
  5. Frankel, David M., 2008. "Adaptive Expectations and Stock Market Crashes," Staff General Research Papers 31688, Iowa State University, Department of Economics.
  6. Nick Bloom, 2007. "Uncertainty and the Dynamics of R&D," American Economic Review, American Economic Association, vol. 97(2), pages 250-255, May.
  7. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
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