IDEAS home Printed from https://ideas.repec.org/p/fth/nystfi/99-071.html
   My bibliography  Save this paper

Multivariate Stock Returns Around Extreme Events: A Reassessment of Economic Fundamentals and the 1987 Market Crash

Author

Listed:
  • Adlai Fisher

Abstract

This paper reassesses the role of economic fundamentals in the 1987 stock market crash using a two factor common-component model of returns. The model decomposes returns into idiosyncratic components, a common white noise component, and a common source of Poisson jumps. Among three two-year sample periods for Major Market Index stocks, only a 1987-88 sample results in an estimated jump component with low frequency and large size. Using Bayes' rule, we infer ex post jump probabilities for each sample day. In contrast to an analogous univariate model for an index return, the multivariate model captures information in the cross-section of returns. Leading financial news on the most likely jump days from the multivariate model is compared with news on a control group of high index return days. Days with high jump probabilities under the multivariate model contain systematically more news related to the dollar, trade deficits, and financing of the U. S. budget deficit. This suggest that the common jump component proxies for economic fundaments related to this cluster of news events, and that the unexpectedly large U.S. trade deficit news released on the Wednesday prior to the crash provided an economic catalyst for the event.

Suggested Citation

  • Adlai Fisher, 1999. "Multivariate Stock Returns Around Extreme Events: A Reassessment of Economic Fundamentals and the 1987 Market Crash," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-071, New York University, Leonard N. Stern School of Business-.
    • Handle: RePEc:fth:nystfi:99-071
    as

    Download full text from publisher

    File URL: http://www.stern.nyu.edu/fin/workpapers/papers99/wpa99071.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    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. Grossman, Sanford J, 1988. "An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies," The Journal of Business, University of Chicago Press, vol. 61(3), pages 275-298, July.
    3. Bates, David S, 1991. "The Crash of '87: Was It Expected? The Evidence from Options Markets," Journal of Finance, American Finance Association, vol. 46(3), pages 1009-1044, July.
    4. Brennan, Michael J & Schwartz, Eduardo S, 1989. "Portfolio Insurance and Financial Market Equilibrium," The Journal of Business, University of Chicago Press, vol. 62(4), pages 455-472, October.
    5. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 457-510.
    6. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    7. Grossman, Sanford J & Miller, Merton H, 1988. " Liquidity and Market Structure," Journal of Finance, American Finance Association, vol. 43(3), pages 617-637, July.
    8. Gennotte, Gerard & Leland, Hayne, 1990. "Market Liquidity, Hedging, and Crashes," American Economic Review, American Economic Association, vol. 80(5), pages 999-1021, December.
    9. Kim, Chang-Jin & Kim, Myung-Jig, 1996. "Transient Fads and the Crash of '87," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(1), pages 41-58, Jan.-Feb..
    10. Schwert, G William, 1990. "Stock Volatility and the Crash of '87," The Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 77-102.
    11. Shiller, Robert J, 1990. "Speculative Prices and Popular Models," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 55-65, Spring.
    12. Greenwald, Bruce C & Stein, Jeremy, 1988. "The Task Force Report: The Reasoning behind the Recommendations," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 3-23, Summer.
    13. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    14. Leland, Hayne & Rubinstein, Mark, 1988. "Comments on the Market Crash: Six Months After," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 45-50, Summer.
    15. Robert J. Shiller, 1987. "Investor Behavior in the October 1987 Stock Market Crash: Survey Evidence," NBER Working Papers 2446, National Bureau of Economic Research, Inc.
    16. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jennifer Huang & Jiang Wang, 2009. "Liquidity and Market Crashes," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2407-2443, July.
    2. Mingue SUn, 2010. "A Branch-and-Bound Algorithm for Representative Integer Efficient Solutions in Multiple Objective Network Programming Problems," Working Papers 0007, College of Business, University of Texas at San Antonio.
    3. Markus K. Brunnermeier & Lasse Heje Pedersen, 2005. "Predatory Trading," Journal of Finance, American Finance Association, vol. 60(4), pages 1825-1863, August.
    4. Yiuman Tse & Michael Williams, 2011. "Does Index Speculation Impact Commodity Prices? An Intraday Futures Analysis Using intraday data, we find that unidirectional causality runs from commodity index linked commodity futures to non-index ," Working Papers 0007, College of Business, University of Texas at San Antonio.
    5. Antonio E. Bernardo & Ivo Welch, 2004. "Liquidity and Financial Market Runs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 135-158.
    6. Rüdiger Frey & Alexander Stremme, 1997. "Market Volatility and Feedback Effects from Dynamic Hedging," Mathematical Finance, Wiley Blackwell, vol. 7(4), pages 351-374, October.
    7. 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.
    8. Sushant Acharya & Keshav Dogra & Sanjay R. Singh, 2021. "The financial origins of non-fundamental risk," Working Papers 345, University of California, Davis, Department of Economics.
    9. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186, Elsevier.
    10. Albert Wang & Joon Chae, 2004. "Who makes markets? The Role of Dealers and Liquidity Provision," Econometric Society 2004 North American Summer Meetings 364, Econometric Society.
    11. Carol L. Osler, 2003. "Currency Orders and Exchange Rate Dynamics: An Explanation for the Predictive Success of Technical Analysis," Journal of Finance, American Finance Association, vol. 58(5), pages 1791-1820, October.
    12. Cars Hommes & Florian Wagener, 2008. "Complex Evolutionary Systems in Behavioral Finance," Tinbergen Institute Discussion Papers 08-054/1, Tinbergen Institute.
    13. Pradipkumar Ramanlal & Steven Mann, 1998. "Portfolio Insurance Strategies when Hedging Affects Share Prices," Journal of Financial Services Research, Springer;Western Finance Association, vol. 13(1), pages 23-35, February.
    14. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    15. Hommes, C.H., 2005. "Heterogeneous Agent Models in Economics and Finance, In: Handbook of Computational Economics II: Agent-Based Computational Economics, edited by Leigh Tesfatsion and Ken Judd , Elsevier, Amsterdam 2006," CeNDEF Working Papers 05-03, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    16. Bernhard Nietert, 1999. "Dynamische Portfolio-Selektion unter Berücksichtigung von Kurssprüngen," Schmalenbach Journal of Business Research, Springer, vol. 51(9), pages 832-866, September.
    17. Joel M. Vanden, 2006. "Portfolio Insurance And Volatility Regime Switching," Mathematical Finance, Wiley Blackwell, vol. 16(2), pages 387-417, April.
    18. Kryzanowski, Lawrence & Switzer, Lorne & Jiang, Li, 1995. "Stock market crash behavior of screen-sorted portfolios," International Review of Economics & Finance, Elsevier, vol. 4(3), pages 227-244.
    19. Joon Chae & Albert Wang, 2004. "Who makes market," Econometric Society 2004 Far Eastern Meetings 605, Econometric Society.
    20. Patrick Artus & Claude Jessua, 1996. "La spéculation," Revue Économique, Programme National Persée, vol. 47(3), pages 409-424.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fth:nystfi:99-071. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Krichel (email available below). General contact details of provider: https://edirc.repec.org/data/fdnyuus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.