Firm Stock Returns' Sensitivities to Crisis Shocks

Abstract:     
We identify three “crisis shocks” related to key features of the 2007-2008 crisis: (1) the collapse of global demand, (2) the contraction of credit supply, and (3) selling pressure on firms’ equity. Using an international cross-section of firms, we analyze whether firms’ sensitivities to these shocks are reflected in stock returns over the period of the global financial crisis of 2007-2008. Firms’ sensitivities to these three “crisis shocks” result in large and statistically significant influences on residual equity returns during the crisis period (after controlling for normal risk factors that are associated with expected returns). Similar analysis for the placebo period of August 2005-December 2006 shows that the influences identified during the 2007-2008 sample period are not significant. A month-by-month analysis shows that the time variation of the importance of each of the sensitivities to shocks tracks related changes in the global economic environment.

Number of Pages in PDF File: 37

Keywords: stock returns, crisis

JEL Classification: F30, G01, G12

working papers series