Abstract
In this article, we aim to explain what causes the depth of a stock market drawdown using the discretionary global macro approach. Our key finding is that the increase in credit risk to high/very high level after the beginning of a drawdown significantly explains the depth of the drawdown. An expected aggressive monetary policy tightening can trigger a correction, especially if accompanied with a high recession probability. Further, an expected aggressive monetary policy easing, as a sign of an imminent recession, can deepen the total drawdown. However, the depth of the total drawdown depends of whether the drawdown transitions to the ultimate credit crunch stage.
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Notes
As of June 30, 2021, the top five countries in the EAFE Index, include Japan (23%) the United Kingdom (14.38%), France (11.52%), Switzerland (9.8%), and Germany (9.41%).
The MSCI BRIC Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance across the following 4 Emerging Markets country indexes: Brazil, Russia, India and China.
We computed the total drawdown for US stocks, excluding the 2001 bear market rally of over 20% percent.
Japan had a bubble burst in 1990, so also looked at the EAFE ex Japan Index for better comparison.
No data available for developing stock markets.
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Tokic, D., Jackson, D. When a correction turns into a bear market: What explains the depth of the stock market drawdown? A discretionary global macro approach. J Asset Manag 24, 184–197 (2023). https://doi.org/10.1057/s41260-023-00306-3
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DOI: https://doi.org/10.1057/s41260-023-00306-3