30 Pages Posted: 21 Oct 2010 Last revised: 12 Nov 2010
Date Written: May 20, 2010
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.
Keywords: Market Crashes, Volatility, Rare Events, 19th Century, 20th Century
JEL Classification: G1, G12, N23, N24
Suggested Citation: Suggested Citation
Le Bris, David, What is a Market Crash? (May 20, 2010). Paris December 2010 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=1695065