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Identifying the bottom line after a stock market crash

B. M. Roehner
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Abstract

In this empirical paper we show that in the months following a crash there is a distinct connection between the fall of stock prices and the increase in the range of interest rates for a sample of bonds. This variable, which is often referred to as the interest rate spread variable, can be considered as a statistical measure for the disparity in lenders' opinions about the future; in other words, it provides an operational definition of the uncertainty faced by economic agents. The observation that there is a strong negative correlation between stock prices and the spread variable relies on the examination of 8 major crashes in the United States between 1857 and 1987. That relationship which has remained valid for one and a half century in spite of important changes in the organization of financial markets can be of interest in the perspective of Monte Carlo simulations of stock markets.

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BibTeXRIS

B. M. Roehner. 1999-10-14. Identifying the bottom line after a stock market crash. https://doi.org/10.1142/s0129183100000092

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