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Trading Behavior During Stock Market Downturns: The Dow, 1915 - 2004

  • Siklos, Pierre L.
  • Bohl, Martin T.

Stock markets periodically experience sharp falls with some referred to as outright crashes. The extant literature has generally resorted to survey type evidence to determine the behavior of investors during such episodes. These kind of studies come to the conclusion that fundamentals play little role in explaining sharp stock market downturns as in October 1987. We know of no econometric study that asks whether feedback, momentum or trend chasing type behavior might explain the behavior of large stock market downturns. Resorting to a feedback trader model, we estimate a variety of asymmetric GARCH-type models. Based on daily data on the Dow Jones Industrial Average index since 1915 we find that there is evidence of positive feedback trading during episodes of stock market crashes. Hence, the econometric evidence is broadly consistent with findings based on surveys.

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Paper provided by European University Viadrina Frankfurt (Oder), The Postgraduate Research Programme Capital Markets and Finance in the Enlarged Europe in its series Working Paper Series with number 2005,7.

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Date of creation: 2005
Date of revision:
Handle: RePEc:zbw:euvgra:20057
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  1. Gregory Koutmos & Reza Saidi, 2001. "Positive feedback trading in emerging capital markets," Applied Financial Economics, Taylor & Francis Journals, vol. 11(3), pages 291-297.
  2. 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.
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  5. repec:att:wimass:9002 is not listed on IDEAS
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