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The microstructure of fear, the Fama–French factors and the global financial crisis of 2007 and 2008

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  • Lim, Dominic
  • Durand, Robert B.
  • Yang, Joey Wenling

Abstract

We analyze minute by minute equity price data from 1 August 2005 to 31 October 2008 to study the relationship between the three sources of systematic risk in Fama and French's (1993) model and the market's expectation of total risk as represented by the VIX (the “fear factor”). Our findings confirm the predicted relationship between the equity risk-premium and risk (Merton, 1980). We find that the size-premium is driven by investors who are flying-to-quality (Abel, 1988; Barsky, 1989). We also find that investors became increasingly sensitive to changes in the VIX during the global financial crisis.

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  • Lim, Dominic & Durand, Robert B. & Yang, Joey Wenling, 2014. "The microstructure of fear, the Fama–French factors and the global financial crisis of 2007 and 2008," Global Finance Journal, Elsevier, vol. 25(3), pages 169-180.
    • Handle: RePEc:eee:glofin:v:25:y:2014:i:3:p:169-180
    DOI: 10.1016/j.gfj.2014.10.001
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    1. Gupta, Kartick & Banerjee, Rajabrata, 2019. "Does OPEC news sentiment influence stock returns of energy firms in the United States?," Energy Economics, Elsevier, vol. 77(C), pages 34-45.
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    3. Lee A. Smales, 2017. "Effect of investor fear on Australian financial markets," Applied Economics Letters, Taylor & Francis Journals, vol. 24(16), pages 1148-1153, September.
    4. Smales, Lee A., 2015. "Time-variation in the impact of news sentiment," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 40-50.
    5. Smales, L.A., 2016. "Risk-on/Risk-off: Financial market response to investor fear," Finance Research Letters, Elsevier, vol. 17(C), pages 125-134.

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    More about this item

    Keywords

    Microstructure; VIX; Fama-french factors; Global financial crisis;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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