How Did the Financial Crisis Affect the Daily Stock Returns?
30 Pages Posted: 14 Feb 2014
Date Written: February 12, 2014
In this paper, we investigate the effect of the recent financial crisis on the behavior of stock prices using the daily returns of thirty one major US stocks and the S&P 500 over the 2007/08 period. Unconditional mean daily returns fell to negative levels, unconditional volatility surged more than two hundred percent, and correlation between stocks weakened. Beta risk increased significantly for financial stocks and the importance of market risk for them dropped, but the financial stocks still turned up a stellar alpha performance. Conditional variance persistence increased, but leverage effect became only somewhat stronger and was not pervasive, and conditional volatility risk premium did not rise. Also, negative skewness of the unconditional distribution weakened. The unconditional kurtosis effect is mixed for stocks but dropped for the S&P 500. Empirical one tail 99% Value at Risk for stock portfolios shot up more than two hundred percent, driven mainly by surging volatilities, and not by departures from Normality.
Keywords: financial crisis, beta risk, GARCH, skewness and kurtosis, Value at Risk
JEL Classification: G12, G01, G13, G21
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