Mean Reversion Expectations and the 1987 Stock Market Crash: An Empirical Investigation

Eric Hillebrand ()

Finance from University Library of Munich, Germany

Abstract: After the stock market crash of 1987, Fischer Black proposed a model in which he explained the crash by inconsistencies in the formation of expectations of mean reversion in stock returns. Following this explanation, a model that allows for mean reversion in stock returns is estimated on daily stock index data around the crash of 1987. The results strongly support Black’s hypothesis. Simulations show that on Friday Oct 16, 1987, a crash of 20 percent or more had a probability of more than seven percent.

Keywords: stock-market crash; mean reversion; stock return predictability; change-points (search for similar items in EconPapers)
JEL-codes: C22 G10 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2005-01-31
New Economics Papers: this item is included in nep-bec, nep-cmp, nep-fin and nep-his
Note: Type of Document - pdf; pages: 42
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0501/0501015.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0501015

Access Statistics for this paper

More papers in Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).