In this paper, we study and compare the determinants of stock returns in the 1987 and 2008 stock market meltdowns with the multivariate regression analysis technique. We find that technical insolvency risk and bankruptcy risk were significant determinants of stock returns in the 2008 market meltdown. Investors were also somewhat concerned with bankruptcy risk in the 1987 market meltdown. However, technical insolvency risk was not a significant determinant of stock returns in the 1987 meltdown. Our findings indicate that stocks with higher betas, larger market cap, and greater return volatility lost more value in both meltdowns. We find the market-to-book ratio to be a significant determinant of stock returns in the 2008 meltdown but not in the 1987 meltdown. We find stock illiquidity to be a significant determinant of stock returns in the 1987 meltdown but not in the 2008 meltdown. With data for two most important stock market meltdowns in U.S. history since the Great Depression, we test several extant theories related to the determinants of stock returns.
|Original language||English (US)|
|Number of pages||12|
|Journal||Banking and Finance Review|
|State||Published - Dec 1 2010|
All Science Journal Classification (ASJC) codes
- Economics and Econometrics