A Mean-Reversion Theory of Stock-Market Crashes


Errors in the perception of mean-reversion expectations can cause stockmarket crashes. This view was proposed by Fischer Black after the stockmarket crash of 1987. I discuss this concept and specify a stock-price model with mean-reversion in returns. Using daily data of the Dow Jones Industrial Average and the S&P500 index I show that mean-reversion in… (More)


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