Extreme US stock market fluctuations in the wake of 9|11

S. T. M. Straetmans, W. F. C. Verschoor and Christian Wolff
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S. T. M. Straetmans: Limburg Institute of Financial Economics (LIFE), Maastricht University, the Netherlands, Postal: Limburg Institute of Financial Economics (LIFE), Maastricht University, the Netherlands
W. F. C. Verschoor: LIFE, Maastricht University and Radboud University Nijmegen, the Netherlands, Postal: LIFE, Maastricht University and Radboud University Nijmegen, the Netherlands

Journal of Applied Econometrics, 2008, vol. 23, issue 1, pages 17-42

Abstract: We apply extreme value analysis to US sectoral stock indices in order to assess whether tail risk measures like value-at-risk and extremal linkages were significantly altered by 9|11. We test whether semi-parametric quantile estimates of 'downside risk' and 'upward potential' have increased after 9|11. The same methodology allows one to estimate probabilities of joint booms and busts for pairs of sectoral indices or for a sectoral index and a market portfolio. The latter probabilities measure the sectoral response to macro shocks during periods of financial stress (so-called 'tail-βs'). Taking 9|11 as the sample midpoint we find that tail-βs often increase in a statistically and economically significant way. This might be due to perceived risk of new terrorist attacks. Copyright © 2008 John Wiley & Sons, Ltd.

Date: 2008
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