Statistical analysis of bankrupting and non-bankrupting stocks
Department of Physics and Center for Polymer Studies, Boston University - Boston, MA 02215, USA
2 Department of Physics, State Key Laboratory of Surface Physics, and Key Laboratory of Micro and Nano Photonic Structures (Ministry of Education), Fudan University - Shanghai 200433, China
Accepted: 22 March 2012
The recent financial crisis has caused extensive world-wide economic damage, affecting in particular those who invested in companies that eventually filed for bankruptcy. A better understanding of stocks that become bankrupt would be helpful in reducing risk in future investments. Economists have conducted extensive research on this topic, and here we ask whether statistical physics concepts and approaches may offer insights into pre-bankruptcy stock behavior. To this end, we study all 20092 stocks listed in US stock markets for the 20-year period 1989–2008, including 4223 (21 percent) that became bankrupt during that period. We find that, surprisingly, the distributions of the daily returns of those stocks that become bankrupt differ significantly from those that do not. Moreover, these differences are consistent for the entire period studied. We further study the relation between the distribution of returns and the length of time until bankruptcy, and observe that larger differences of the distribution of returns correlate with shorter time periods preceding bankruptcy. This behavior suggests that sharper fluctuations in the stock price occur when the stock is closer to bankruptcy. We also analyze the cross-correlations between the return and the trading volume, and find that stocks approaching bankruptcy tend to have larger return-volume cross-correlations than stocks that are not. Furthermore, the difference increases as bankruptcy approaches. We conclude that before a firm becomes bankrupt its stock exhibits unusual behavior that is statistically quantifiable.
PACS: 89.65.Gh – Economics; econophysics, financial markets, business and management / 89.75.Da – Systems obeying scaling laws
© EPLA, 2012