Extreme Us Stock Market Fluctuations in the Wake of 9/11

27 Pages Posted: 8 Dec 2003

See all articles by Stefan Straetmans

Stefan Straetmans

Maastricht University ; University of Antwerp - Faculty of Applied Economics

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Christian C. P. Wolff

University of Luxembourg - Luxembourg School of Finance; Centre for Economic Policy Research (CEPR)

Date Written: March 2003

Abstract

It is common wisdom that the 9/11 terrorist attacks boosted political and financial uncertainty and resulted in severe stock market meltdowns in the months after the attacks. Taking a sectoral focus of the market for US common stock, we apply statistical extreme value analysis (EVT) to assess whether downside risk measures like Value-at-Risk (VaR) and extremal sector linkages were significantly altered by 9/11. We use a semi-parametric quantile estimator for the VaR in order to test whether downside risk increased after 9/11. We also estimate the co-exceedance probability of observing joint meltdowns in sectoral and market portfolio indices by employing a dependence measure from bivariate extreme value theory. These tail beta's may be thought of as measuring systematic risk during high volatility regimes. Taking 9/11 as the sample midpoint we do find that nearly all sectoral tail beta's have risen over time. This indicates that the potential for domestic portfolio diversification during crisis periods, i.e. when diversification is most needed, decreased compared to the pre-9/11 era. As for the pre-9/11 and post-9/11 VaR estimates, we do not find much support for a structural change in downside risk.

Keywords: Market Crashes, Bivariate Extreme Value Analysis, Extreme Co-movements, heavy tails, Value-at-Risk, tail beta, extreme dependence

JEL Classification: G1, F3, C49

Suggested Citation

Straetmans, Stefan and Verschoor, Willem F. C. and Wolff, Christian C. P., Extreme Us Stock Market Fluctuations in the Wake of 9/11 (March 2003). AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=471586 or http://dx.doi.org/10.2139/ssrn.471586

Stefan Straetmans

Maastricht University ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.stefanstraetmans.com

University of Antwerp - Faculty of Applied Economics ( email )

Prinsstraat 13
Antwerp, B-2000
Belgium

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Christian C. P. Wolff (Contact Author)

University of Luxembourg - Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246
Luxembourg

HOME PAGE: http://www.lsf.lu

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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