What Triggers National Stock Market Jumps?

By: Scott Baker, Nicholas Bloom, Steve Davis and Marco Sammon

Format:Print
| Language:English

Abstract

We examine newspapers the day after major stock-market jumps to evaluate the proximate cause, geographic source, and clarity of these events from 1900 in the US, 1930 in the UK and 1980 in 12 other countries. We find four main results. First, the United States plays an outsized role in global stock markets, accounting for 35% of jumps outside the US since the 1980s. Second, policy causes a higher share of positive than negative jumps in all countries we examine, particularly monetary and government spending policy. We provide evidence that suggests these expansionary policy decisions are often made in response to poor economic conditions. Third, jumps caused by non-policy events lead to higher future volatility, while jumps caused by policy events (particularly monetary policy) reduce future volatility. Finally, the clarity of the cause of stock market jumps predicts future stock returns volatility. This type of clarity has increased substantially since 1900 as news and financial markets have become more transparent.