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.
|Date of creation:||Nov 2009|
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- Dilip Abreu & Markus K. Brunnermeier, 2003.
"Bubbles and Crashes,"
Econometric Society, vol. 71(1), pages 173-204, January.
- Nick Bloom, 2007.
"Uncertainty and the Dynamics of R&D,"
CEP Discussion Papers
dp0792, Centre for Economic Performance, LSE.
- 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.
- Nicholas Bloom, 2007. "Uncertainty and the Dynamics of R&D," NBER Working Papers 12841, National Bureau of Economic Research, Inc.
- Nicholas Bloom, 2007. "Uncertainty and the Dynamics of R&D," Discussion Papers 07-021, Stanford Institute for Economic Policy Research.
- 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.
- Zeira, Joseph, 1999.
"Informational overshooting, booms, and crashes,"
Journal of Monetary Economics,
Elsevier, vol. 43(1), pages 237-257, February.
- Nicholas Bloom, 2007.
"The Impact of Uncertainty Shocks,"
NBER Working Papers
13385, National Bureau of Economic Research, Inc.
- G. William Schwert, 1989.
"Stock Volatility and the Crash of '87,"
NBER Working Papers
2954, National Bureau of Economic Research, Inc.
- Frankel, David M., 2008. "Adaptive Expectations and Stock Market Crashes," Staff General Research Papers Archive 31688, Iowa State University, Department of Economics.
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