What is a Market Crash?
David Le Bris
Toulouse Business School
May 20, 2010
Paris December 2010 Finance Meeting EUROFIDAI - AFFI
Identifying market crashes can be problematic. In a stable financial environment, the same price variation in percentage will result in greater negative impact than during a highly volatile period.
In order to take into account changes of volatility throughout time, a new method is proposed, one which allows to adjust each price variation to accurately reflect its financial environment. This adjustment is made by measuring each price variation in number of standard-deviations calculated over the prior period. These adjusted variations can then be ranked therefore permitting the identification of market crashes. This method is tested on four long term series. Results on the French market, for example, are highly consistent with history. WWI caused major stock adjusted variations despite a low level of volatility and low price variations in percentage. Contemporary markets however are characterized more so by a high level of volatility than a time of frequent crashes.
Number of Pages in PDF File: 30
Keywords: Market Crashes, Volatility, Rare Events, 19th Century, 20th Century
JEL Classification: G1, G12, N23, N24
Date posted: October 21, 2010 ; Last revised: November 12, 2010