What Triggers Stock Market Jumps?

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 and 1980 (or earlier) in 13 other countries. We find three main results. First, the United States plays an outsized role in global stock-markets, accounting for 35% of jumps outside the US since 1980s, far above its 15% share of GDP. This matches other evidence on the dominance of the US in global finance. Second, the clarity of the cause of stock market jumps has been increasing notably since 1900, as news and financial markets have become more transparent. Jump clarity predicts future stock returns volatility: doubling the clarity index of a jump reduces future volatility by 68%. Third, jumps caused by non-policy events (particularly macroeconomics news) lead to higher future stock-volatility, while jumps caused by policy events (particularly monetary policy) reduce future stock-volatility. This suggests while monetary policy surprises lead to stock-market jumps, they may reduce future volatility.

Joint work with Nicholas Bloom, Steve Davis and Marco Sammon
Keywords: uncertainty, policy uncertainty, volatility, stock market