Trade Deficit News, Systematic Risk and the Crash of 1987

Willem Thorbecke

Eastern Economic Journal, 1994, vol. 20, issue 1, 97-106

Abstract: News of enormous trade deficits began affecting asset prices in the mid-1980s. Some have suggested that trade deficit news contributed to the October 1987 stock market crash. This argument would be more compelling if the trade deficit were a source of systematic risk to asset prices, since then trade deficit news could have contributed to the increased perception of the riskiness of holding equities that occurred just before the crash. Here the Arbitrage Pricing Theory is used to demonstrate that the trade deficit is a source of systematic risk. This evidence supports the hypothesis that trade deficit new contributed to the October 1987 crash.

Keywords: Arbitrage; Stock Market; Trade (search for similar items in EconPapers)
JEL-codes: F14 G14 (search for similar items in EconPapers)
Date: 1994
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Citations: View citations in EconPapers (3)

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