Definition: A stock market crash is when stock indexes lose more than 10% in a day or two. These factors are unable to account for all of investors’ exaggeration of crash probabilities, however, since at no point did the average individual investor believe those probabilities to be lower than 13.5%—17 times higher than the probability based on historical frequencies alone.
Although three months have since passed without the market crashing – the last two crashes needed an average of 20 months to play out, with the S&P 500 declining an average of 51.5%. NIA is 100% sure that its indicator will be proven right once again, but we will need to wait until October 2016 for the crash to fully play out.
There had been a great deal of corporate restructuring in the preceding years, and American companies were promising strong future earnings growth International investors also took notice of the improvements in the U.S. market outlook, and the rate of foreign investment doubled between 1986 and 1987, driving stock prices upward.
My prediction last year was that they would be able to raise rates once and would do so in December and then would find themselves continually stuck after that where they would either not raise rates, or if they did raise rates because they couldn’t stand losing face, it would cause a stock market crash.
This magnitude is broadly in line with previous finings by, for example, Kezdi and Willis (2008) The post-crash relationship is just the opposite; there, the coefficient implies that the same one per cent increase would be followed by a drop of 0.4 percentage points (=0.335-0.721).