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

Eric Hillebrand ()

Finance from EconWPA

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: G10 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cmp, nep-fin and nep-his
Date: Written 2005-01-31
Note: Type of Document - pdf; pages: 42
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