Speculative Behaviour, Regime-Switching, and Stock Market Crashes

Simon van Norden (), Huntley Schaller and )

Econometrics from University Library of Munich, Germany

Abstract: This paper explores two very different models which might account for stock market crashes. A key innovative feature of our paper is that we use the models to show how their implications for stock market crashes may be tested using switching-regression econometrics. We are careful to show that our switching regressions reveal new patterns in the data which go well beyond known stylized facts (such as time-varying volatility, the leverage effect, and mean reversion.) We refer to the first model, which is based on historical accounts of "manias and panics," as a model of speculative behaviour; its key features are that "overvaluation" increases the probability and expected size of a stock market crash. We refer to the second model, in which there are regime switches in epxected dividend growth rates, as a model of switching fundamentals. Our results suggest that both speculative behaviour and news about fundamentals may be needed to explain stock market crashes.

JEL-codes: C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Pages: 45 pages
Date: 1995-02-07
Note: 45 pages of text & 8 pages graphs. Text and Graphs in separate Postscript files. Both files compressed in a single Info-zip archive, then uuencoded.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/em/papers/9502/9502003.ps.gz (application/postscript)
https://econwpa.ub.uni-muenchen.de/econ-wp/em/papers/9502/9502003.pdf (application/pdf)

Related works:
Working Paper: Speculative Behaviour, Regime-Switching and Stock Market Crashes (1996)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpem:9502003

Access Statistics for this paper

More papers in Econometrics from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).