How Did the Financial Crisis Affect Daily Stock Returns?

Abstract

In this article, the author investigates the effect of the recent financial crisis on the behavior of stock prices using the daily returns of 31 major U.S. stocks and the S&P 500 Index over the 2007–2008 period. Unconditional mean daily returns fell to negative levels, unconditional volatility surged more than 200%, and correlations between stocks weakened. Beta risk increased significantly for financial stocks and the importance of market risk for them dropped, but the financial stocks still turned out a stellar alpha performance. Conditional variance persistence increased, but leverage effect became only somewhat stronger and was not pervasive, and conditional volatility risk premium did not rise. Also, negative skewness of the unconditional distribution weakened. The unconditional kurtosis effect is mixed for stocks but dropped for the S&P 500. Empirical one-tail 99% value at risk for stock portfolios shot up more than 200%, driven mainly by surging volatilities—not by departures from normality.

TOPICS: Security analysis and valuation, financial crises and financial market history