Premium
Transient fads and the crash of ′87
Author(s) -
Kim ChangJin,
Kim MyungJig
Publication year - 1996
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/(sici)1099-1255(199601)11:1<41::aid-jae364>3.0.co;2-r
Subject(s) - crash , econometrics , autoregressive conditional heteroskedasticity , volatility (finance) , economics , heteroscedasticity , implied volatility , volatility smile , stock market crash , stochastic volatility , stock market , forward volatility , financial economics , markov chain , computer science , statistics , mathematics , geography , programming language , context (archaeology) , archaeology
Using a fad model with Markov‐switching heteroscedasticity in both the fundamental and fad components (UC‐MS model), this paper examines the possibility that the 1987 stock market crash was an example of a short‐lived fad. While we usually think of fads as speculative bubbles, what the UC‐MS model seems to be picking up is unwarranted pessimism which the market exhibited with the OPEC oil shock and the '87 crash. Furthermore, the conditional variance implied by the UC‐MS model captures most of the dynamics in the GARCH specification of stock return volatility. Yet unlike the GARCH measure of volatility, the UC‐MS measure of volatility is consistent with volatility reverting to its normal level very quickly after the crash.