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Volatility, Information and Stock Market Crashes

Nikolaos Antonakakis and Johann Scharler

No 2009-18, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: In this paper, we examine the evolution of the S&P500 returns volatility around market crashes using a Markov-Switching model. We find that volatility typically switches into the high volatility state well before a crash and remains in the high state for a considerable period of time after the crash. These results do not support the view that crashes are due to the resolution of uncertainty (e.g. Romer, 1993), but are consistent with the model in Frankel (2008) where the adaptive forecasts of volatility by uniformed traders result in a crash.

Keywords: Stock Market Crash; Volatility; Markov Switching (search for similar items in EconPapers)
JEL-codes: C11 D8 G0 (search for similar items in EconPapers)
Date: 2009-11
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http://www.econ.jku.at/papers/2009/wp0918.pdf (application/pdf)

Related works:
Journal Article: VOLATILITY INFORMATION AND STOCK MARKET CRASHES (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:jku:econwp:2009_18

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