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Please use this identifier to cite or link to this item: http://hdl.handle.net/1974/1233

Title: Market impacts in major events: an analysis using state price distributions
Authors: Foo, Siow Moi

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Keywords: State price distribution
Behavioural finance
State price density
Issue Date: 2008
Series/Report no.: Canadian theses
Abstract: For the past two decades, events on the world stage and particularly in the United States have serious implications for the operations of financial markets. In this study, we will attempt to provide some insights into information dispersion before and after three particular events: the near collapse of Long Term Capital Management in August 1998, the Tech-Bubble Burst in March 2000, and the terrorist attack on September 11, 2001. A study of these events will yield insights into the resolution of information uncertainties in the financial markets. We estimated state prices and state price densities using Claims-based asset pricing (a la Ross (2000)). We then used our results to gauge investor sentiments three months before and three months after each event. We also used two new measures of the level of pessimism in the market during these events: skewness of the state price distributions and the percentages of discount states (with state price densities greater than one). Our results clearly indicate that different markets reacted differently to the three events, and that there were different levels of information leakage in the markets for each event. As expected, the impacts from the 9/11 event were immediate but short-lived in both the SPX and NDX markets. Further, our results show that event impact contamination played an important role in the over- and under-reactions to the three events. More specifically, our results indicate that the LTCM event was closely related to and was probably precipitated by the Russian Currency Crisis. As well, the 9/11 event occurred immediately following predictions of a U.S. economic recession, and three months prior to the declaration of the War on Terror. Our results show lulls and peaks in market expectations which correspond to these separate and yet correlated events.
Description: Thesis (Ph.D, Management) -- Queen's University, 2008-05-30 13:29:49.85
URI: http://hdl.handle.net/1974/1233
Appears in Collections:Queen's Graduate Theses and Dissertations
Smith School of Business Graduate Theses

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