Arbitrage, nontrading, and stale prices: October 1987

Article Abstract:

The anomalous behavior of the Standard and Poor's (S&P) 500 stock index and futures prices during the Oct 1987 stock market crash is examined. During this period the S&P index behaved like a moving average of the futures, indicating nonsynchroneity between the prices of stocks and the index they compose. The aberrant S&P index behavior after about an hour and a half of delayed openings on Oct 19 and 20 could not be accounted for by nontrading, the usual reason for the lack of sychronicity in prices. It is proposed that the nonsynchronous prices in Oct 1987 were caused instead by the execution of stale buy orders that resulted in stale information in stock prices. Although this practice does not usually cause large discrepancies between cash and futures indexes, it did so in 1987 because of a combination of factors that included the large volume of transactions and the market mechanisms at work at the New York Stock Exchange.

Futures, Stock Market Crash, 1987, Standard and Poor's 500-Stock Price Index

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Bias in small sample tests of stock price rationality

Article Abstract:

Under the maintained assumption that prices and dividends follow stationary and ergodic stochastic processes, a severe small-sample bias is demonstrated in the use of sample variances to test stock price variance bounds. The smoothness of the 'perfect foresight' price, which is used to construct the variance bound, results in this bias. The small-sample bias does not, however, seem sufficient to account for the apparent gross violations of the stock price variance bounds. The stock price variance bounds tests thus provide results distinct from those based on bonds.

Testing, Stock price forecasting, Business forecasting

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Anomalies in financial economics: Blueprint for change?

Article Abstract:

Apparent anomalies in the field of financial economics have given rise to the belief that the underlying assumptions about behavior need to be changed. The 'excess volatility' of stock prices is cited as a reason for challenging the purely rational models of economic behavior. It is questioned whether the phenomenon of excess volatility within stock and security prices exists.

Models, Economic aspects, Economics, Securities, Securities prices, Behavioral assessment, Finance, Rational expectations (Economics)

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