Identifying the bottom line after a stock market crash

B. M. Roehner

Papers from arXiv.org

Abstract: In this empirical paper we show that in the months following a crash there is a distinct connection between the fall of stock prices and the increase in the range of interest rates for a sample of bonds. This variable, which is often referred to as the interest rate spread variable, can be considered as a statistical measure for the disparity in lenders' opinions about the future; in other words, it provides an operational definition of the uncertainty faced by economic agents. The observation that there is a strong negative correlation between stock prices and the spread variable relies on the examination of 8 major crashes in the United States between 1857 and 1987. That relationship which has remained valid for one and a half century in spite of important changes in the organization of financial markets can be of interest in the perspective of Monte Carlo simulations of stock markets.

Date: 1999-10
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:cond-mat/9910213

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