Market Dynamics Immediately Before and After Financial Shocks: Quantifying the Omori, Productivity and Bath Laws
Physical Review E, Vol. 82, 2010
16 Pages Posted: 24 Oct 2010
Date Written: October 3, 2010
Abstract
We study the cascading dynamics immediately before and immediately after 219 market shocks. We define the time of a market shock T_{c} to be the time for which the market volatility V(T_{c}) has a peak that exceeds a predetermined threshold. The cascade of high volatility "aftershocks" triggered by the "main shock" is quantitatively similar to earthquakes and solar flares, which have been described by three empirical laws - the Omori law, the productivity law, and the Bath law. We analyze the most traded 531 stocks in U.S. markets during the two-year period 2001-2002 at the 1-minute time resolution. We find quantitative relations between the "main shock" magnitude M\equiv\log_{10} V(T_{c}) and the parameters quantifying the decay of volatility aftershocks as well as the volatility preshocks. We also find that stocks with larger trading activity react more strongly and more quickly to market shocks than stocks with smaller trading activity. Our findings characterize the typical volatility response conditional on M, both at the market and the individual stock scale. We argue that there is potential utility in these three statistical quantitative relations with applications in option pricing and volatility trading.
Keywords: Volatility Aftershocks, Market Shocks, Market Response Dynamics, News
JEL Classification: C22, G14, D82, D84
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Impact of Trades on Daily Volatility
By Doron Avramov, Tarun Chordia, ...
-
Priced Risk and Asymmetric Volatility in the Cross-Section of Skewness
By Robert F. Engle and Abhishek Mistry
-
Why are Stock Returns and Volatility Negatively Correlated?
By Jinho Bae, Chang-jin Kim, ...
-
The Skewness Premium and the Asymmetric Volatility Puzzle
By Canlin Li
-
Components of Bull and Bear Markets: Bull Corrections and Bear Rallies
By John M. Maheu, Thomas H. Mccurdy, ...
-
Extreme Asymmetric Volatility: Stress and Aggregate Asset Prices
By Sofiane Aboura and Niklas Wagner
-
Financial Leverage Does Not Cause the Leverage Effect
By Abdullah C. Aydemir, Michael F. Gallmeyer, ...
-
Surprise Volume and Heteroskedasticity in Equity Market Returns
By Niklas Wagner and Terry Marsh