Estimates of the likelihood of extreme returns in international stock markets
This study applies extreme-value theory to daily international stock-market returns to determine (1) whether or not returns follow a heavy-tailed stable distribution, (2) the likelihood of an extreme return, such as a 20% drop in a single day, and (3) whether or not the likelihood of an extreme event has changed since October 1987. Empirical results reject a heavy-tailed stable distribution for returns. Instead, a Student-t distribution or an autoregressive conditional heteroscedastic process is better able to capture the salient features of returns. We find that the likelihood of a large single-day return diff ers widely across markets and, for the G-7 countries, the 1987 stock-market drop appears to be largely an isolated event. A drop of this magnitude, however, is not rare in the case of Hong Kong. Finally, there is only limited evidence that the chance of a large single-day decline is more likely since the October 1987 market drop; however, exceptions include stock markets in Germany, The Netherlands and the UK.
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Volume (Year): 27 (2000)
Issue (Month): 1 ()
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