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Actual and potential market risks during the stock market turmoil 2007--2008

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  • Mikael Bask
  • Anna Widerberg

Abstract

The aim of this article is to demonstrate how the change in actual and potential market risks in the Dow Jones Industrial Average (DJIA) during the 2-year period 2007 to 2008 can be analysed with the help of ( λ , σ -super-2)-analysis. In the empirical analysis, the average of the Lyapunov exponents for the dynamic system generating DJIA returns is used as the stability measure, λ , whereas the squared DJIA return is used as the variability measure, σ -super-2. The main findings are as follows: (i) the potential market risk in the DJIA did not fluctuate that much during 2007, with the exceptions of early fall and near the end of the year; (ii) the potential market risk fluctuated a lot during 2008, especially in early August and in the middle of September; and (iii) the actual market risk in the DJIA was considerably higher near the end of 2008, especially in October, compared with the rest of the period.

Suggested Citation

  • Mikael Bask & Anna Widerberg, 2012. "Actual and potential market risks during the stock market turmoil 2007--2008," Applied Financial Economics, Taylor & Francis Journals, vol. 22(5), pages 339-349, March.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:5:p:339-349
    DOI: 10.1080/09603107.2011.613758
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    References listed on IDEAS

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    1. Potter, Simon M., 2000. "Nonlinear impulse response functions," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1425-1446, September.
    2. Shintani, Mototsugu & Linton, Oliver, 2004. "Nonparametric neural network estimation of Lyapunov exponents and a direct test for chaos," Journal of Econometrics, Elsevier, vol. 120(1), pages 1-33, May.
    3. Bask, Mikael & de Luna, Xavier, 2005. "EMU and the stability and volatility of foreign exchange: Some empirical evidence," Chaos, Solitons & Fractals, Elsevier, vol. 25(3), pages 737-750.
    4. Dechert, W D & Gencay, R, 1992. "Lyapunov Exponents as a Nonparametric Diagnostic for Stability Analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 41-60, Suppl. De.
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    6. Bask, Mikael, 2010. "Measuring potential market risk," Journal of Financial Stability, Elsevier, vol. 6(3), pages 180-186, September.
    7. Mototsugu Shintani, 2006. "A nonparametric measure of convergence towards purchasing power parity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(5), pages 589-604.
    8. Bask, Mikael & Widerberg, Anna, 2009. "Market structure and the stability and volatility of electricity prices," Energy Economics, Elsevier, vol. 31(2), pages 278-288, March.
    9. Mikael Bask & Jens Lundgren & Niklas Rudholm, 2009. "Market power in the expanding Nordic power market," Applied Economics, Taylor & Francis Journals, vol. 43(9), pages 1035-1043.
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    Cited by:

    1. Sekandary, Ghezal & Bask, Mikael, 2023. "Monetary policy uncertainty, monetary policy surprises and stock returns," Journal of Economics and Business, Elsevier, vol. 124(C).

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