Investors' Behavior on S&P 500 Index during Periods of Market Crashes: A Visibility Graph Approach

Abstract

Investors’ behavior in the market is highly related to the properties that financial time series capture. Particularly, nowadays the availability of high frequency datasets provides a reliable source for the better understanding of investors’ psychology. The main aim of this chapter is to identify changes in the persistency as well as in the local degree of irreversibility of S&P 500 price-index time series. Thus, by considering the US stock market from 1996 to 2010, we investigate how the Dot.com as well as the Subprime crashes affected investors’ behavior. Our results provide evidences that Efficient Market Hypothesis does not hold as the high frequency S&P 500 data can be better modeled by using a fractional Brownian motion. In addition, we report that both crises only temporary effect investors’ behavior, and interestingly, before the occurrence of these two major events, the index series exhibited a kind of “nervousness” on behalf of the investors.

Keywords: High Frequency Data, S&P 500, Hurst Exponent, Irreversibility, Visibility Graph Method

JEL Classification: C02, C55, G02, G14