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

S. T. M. Straetmans, W. F. C. Verschoor and C. C. P. Wolff
Journal of Applied Econometrics
Vol. 23, No. 1, Themes in Financial Econometrics (Jan. - Feb., 2008), pp. 17-42
Published by: Wiley
Stable URL: http://www.jstor.org/stable/25146587
Page Count: 26
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Extreme US Stock Market Fluctuations in the Wake of 9/11
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Abstract

We apply extreme value analysis to US sectoral stock indices in order to assess whether tail risk measures like value-at-risk and extremal linkages were significantly altered by 9/11. We test whether semi-parametric quantile estimates of 'downside risk' and 'upward potential' have increased after 9/11. The same methodology allows one to estimate probabilities of joint booms and busts for pairs of sectoral indices or for a sectoral index and a market portfolio. The latter probabilities measure the sectoral response to macro shocks during periods of financial stress (so-called 'tail-βs'). Taking 9/11 as the sample midpoint we find that tail-βs often increase in a statistically and economically significant way. This might be due to perceived risk of new terrorist attacks.

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