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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27368
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| Title: | Multivariate Stock Returns Around Extreme Events: A Reassessment of
Economic Fundamentals and the 1987 Market Crash |
| Authors: | Fisher, Adlai |
| Issue Date: | Sep-1999 |
| Series/Report no.: | S-MF-99-10 |
| Abstract: | This paper reassesses the role of economic fundamentals in the 1987
stock market crash using a two factor common-component model of returns.
The model decomposes returns into idiosyncratic components, a common
white noise component, and a common source of Poisson jumps. Among three
two-year sample periods for Major Market Index stocks, only a 1987-88
sample results in an estimated jump component with low frequency and
large size. Using Bayes' rule, we infer ex post jump probabilities for
each sample day. In contrast to an analogous univariate model for an
index return, the multivariate model captures information in the
cross-section of returns. Leading financial news on the most likely jump
days from the multivariate model is compared with news on a control
group of high index return days. Days with high jump probabilities under
the multivariate model contain systematically more news related to the
dollar, trade deficits, and financing of the U. S. budget deficit. This
suggest that the common jump component proxies for economic fundaments
related to this cluster of news events, and that the unexpectedly large
U.S. trade deficit news released on the Wednesday prior to the crash
provided an economic catalyst for the event. |
| URI: | http://hdl.handle.net/2451/27368 |
| Appears in Collections: | Macro Finance
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