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Time varying volatility and asymmetric news effect during financial crises evidence from DJIA, S%P 500, NASDAQ and FTSE 100 indices

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  • Samer A.M. Al-Rjoub
  • Hussam Q. Al-Azzam

Abstract

We look at historical episodes in the USA over the last 100 years of major stock market crashes in the Dow Jones industrial average (DJIA), the S%P 500 and the NASDAQ indices to examine the effect of financial crises on stock returns and the news effect. Our main results are: 1) crises affect stock market returns negatively; 2) the monotonic relationship between risk and return is more obvious during crises than without crises; 3) volatility of stock returns is high during crises; 4) the asymmetric news effect (leverage effect) is negative and statistically different from zero for the three indices in all scenarios; 5) the asymmetric news effect is more obvious for the weekly stocks returns. Based on these results, we believe that people's reaction is homogenous and recurs. Psychological factors affect invertors' behaviour during crises where panic magnifies the effect of crises and is reflected in the form of increased volatility and overreaction to bad news. In addition, we replicate the same tests on the FTSE 100 of UK and results coincide.

Suggested Citation

  • Samer A.M. Al-Rjoub & Hussam Q. Al-Azzam, 2019. "Time varying volatility and asymmetric news effect during financial crises evidence from DJIA, S%P 500, NASDAQ and FTSE 100 indices," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 10(2), pages 117-143.
    • Handle: RePEc:ids:injbaf:v:10:y:2019:i:2:p:117-143
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