Time-varying Crash Risk: The Role of Stock Market Liquidity

Peter Christoffersen, Bruno Feunoua, Yoontae Jeon, Chayawat Ornthanalai

Research output: Working paperResearch

Abstract

We estimate a continuous-time model with stochastic volatility and dynamic crash probability for the S&P 500 index and find that market illiquidity dominates other factors in explaining the stock market crash risk. While the crash probability is time-varying, its dynamic depends only weakly on return variance once we include market illiquidity as an economic variable in the model.
Original languageEnglish
Place of PublicationOttowa, ON
PublisherBank of Canada
Number of pages53
Publication statusPublished - Jul 2016
SeriesStaff Working Paper / Bank of Canada
Number2016-35
ISSN1701-9397

Keywords

  • Asset pricing
  • Financial stability
  • Econometric and statistical methods

Cite this

Christoffersen, P., Feunoua, B., Jeon, Y., & Ornthanalai, C. (2016). Time-varying Crash Risk: The Role of Stock Market Liquidity. Bank of Canada. Staff Working Paper / Bank of Canada, No. 2016-35 http://www.bankofcanada.ca/wp-content/uploads/2016/07/swp2016-35.pdf