Nonlinear Time Series Analysis of Economic and Financial Data

Volume 1 of the series Dynamic Modeling and Econometrics in Economics and Finance pp 321-356

Speculative Behavior, Regime-Switching, and Stock Market Crashes

  • Simon van NordenAffiliated withÉcole des Hautes Études Commercial
  • , Huntley SchallerAffiliated withCarleton University

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Stock market crashes have presented a perennial challenge to our understanding of financial markets. The fact that there are sometimes abrupt changes in asset prices with little “news” about economic fundamentals is difficult to reconcile with simple models of asset pricing. Attempts to deal with this fact have tended to follow one of two approaches. The first allows asset prices to be determined by factors that do not affect their fundamental values. The second approach maintains that the market is “efficient,” but suggests that the relationship between economic fundamentals and asset prices is highly nonlinear, so that relatively minor pieces of news sometimes have exceptionally large effects.