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Trade Deficit News, Systematic Risk and the Crash of 1987

Author

Listed:
  • Willem Thorbecke

    (George Mason University)

Abstract

News of enormous trade deficits began affecting asset prices in the mid-1980s. Some have suggested that trade deficit news contributed to the October 1987 stock market crash. This argument would be more compelling if the trade deficit were a source of systematic risk to asset prices, since then trade deficit news could have contributed to the increased perception of the riskiness of holding equities that occurred just before the crash. Here the Arbitrage Pricing Theory is used to demonstrate that the trade deficit is a source of systematic risk. This evidence supports the hypothesis that trade deficit new contributed to the October 1987 crash.

Suggested Citation

  • Willem Thorbecke, 1994. "Trade Deficit News, Systematic Risk and the Crash of 1987," Eastern Economic Journal, Eastern Economic Association, vol. 20(1), pages 97-106, Winter.
    • Handle: RePEc:eej:eeconj:v:20:y:1994:i:1:p:97-106
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    File URL: http://web.holycross.edu/RePEc/eej/Archive/Volume20/V20N1P97_106.pdf
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    Citations

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    Cited by:

    1. Kumar, V. & Ramaswami, Sridhar N. & Srivastava, Rajendra K., 2000. "A Model to Explain Shareholder Returns: Marketing Implications," Journal of Business Research, Elsevier, vol. 50(2), pages 157-167, November.
    2. Þakir Görmüþ & Recep Tekeli & Osman Peker, 2008. "Similarities and Differences of The 1994 and 2001 Turkish Currency Crises: A Signal Approach," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Oguz Esen & Ayla Ogus (ed.), Proceedings of the Conference on Emerging Economic Issues in a Globalizing World, pages 246-260, Izmir University of Economics.
    3. Luo Wang & Bin Li & Benjamin Liu, 2017. "Can Macroeconomic Variables Explain Managed Fund Returns? The Australian Case," Economic Papers, The Economic Society of Australia, vol. 36(2), pages 171-184, June.

    More about this item

    Keywords

    Arbitrage; Stock Market; Trade;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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