Financial Crashes are “Outliers”
Financial Crashes are “Outliers”
This chapter provides evidence that large financial crashes are “outliers.” It first considers the limitation of standard analyses for characterizing how crashes are special before explaining what abnormal returns are. It then discusses the results of a study of the frequency distribution of drawdowns, or runs of successive losses, and shows that large financial crashes form a class of their own that can be seen from their statistical signatures. It also examines the expected distribution of “normal” drawdowns, along with the drawdown distributions of stock market indices such as the Dow Jones Industrial Average and the Nasdaq index. The chapter argues that the presence of outliers is a general phenomenon and concludes by describing how large drawdowns and crashes that result from a run of losses over several successive days affect the regulation of stock markets.
Keywords: financial crashes, drawdown, stock market indices, Dow Jones Industrial Average, Nasdaq index, outlier, stock market
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