Identifying the bottom line after a stock market crash

Abstract

In this empirical paper we show that in the months following a crash there is a distinct connection between the fall of stock prices and the increase in the range of interest rates for a sample of bonds. This variable, which is often referred to as the interest rate spread variable, can be considered as a statistical measure for the disparity in lenders' opinions about the future; in other words, it provides an operational definition of the uncertainty faced by economic agents. The observation that there is a strong negative correlation between stock prices and the spread variable relies on the examination of 8 major crashes in the United States between 1857 and 1987. That relationship which has remained valid for one and a half century in spite of important changes in the organization of financial markets can be of interest in the perspective of Monte Carlo simulations of stock markets.

6 pages, one figure (8 graphics)

References in corpus (2)

• Large financial crashes
• A Prototype Model of Stock Exchange

Cited by in corpus (5)

• Fearless versus Fearful Speculative Financial Bubbles
• Testing the Stability of the 2000-2003 US Stock Market "Antibubble"
• Causal Slaving of the U.S. Treasury Bond Yield Antibubble by the Stock Market Antibubble of August 2000
• Memory effect and multifractality of cross-correlations in financial markets
• The conundrum of stock versus bond prices