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http://ssrn.com/abstract=194948
 
 

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Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices


Joseph Chen


University of California, Davis - Graduate School of Management

Harrison G. Hong


Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jeremy C. Stein


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

December 1999


Abstract:     
This paper is an investigation into the determinants of asymmetries in stock returns. We develop a series of cross-sectional regression specifications which attempt to forecast skewness in the daily returns of individual stocks. Negative skewness is most pronounced in stocks that have experienced: 1) an increase in trading volume relative to trend over the prior six months; and 2) positive returns over the prior thirty-six months. The first finding is consistent with the model of Hong and Stein (1999), which predicts that negative asymmetries are more likely to occur when there are large differences of opinion among investors. The latter finding fits with a number of theories, most notably Blanchard and Watson's (1982) rendition of stock-price bubbles. Analogous results also obtain when we attempt to forecast the skewness of the aggregate stock market, though our statistical power in this case is limited.

Number of Pages in PDF File: 47

JEL Classification: G1

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Date posted: January 3, 2000  

Suggested Citation

Chen, Joseph and Hong, Harrison G. and Stein, Jeremy C., Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices (December 1999). Available at SSRN: http://ssrn.com/abstract=194948 or http://dx.doi.org/10.2139/ssrn.194948

Contact Information

Joseph S. Chen (Contact Author)
University of California, Davis - Graduate School of Management ( email )
One Shields Avenue
Davis, CA 95616
United States
(530) 752-7155 (Phone)
(530) 752-2924 (Fax)
Harrison G. Hong
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jeremy C. Stein
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)
HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html
National Bureau of Economic Research (NBER)
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Cambridge, MA 02138
United States
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