Finance Faculty Publications and Presentations

When a correction turns into a bear market: What explains the depth of the stock market drawdown? A discretionary global macro approach

Document Type

Article

Publication Date

3-7-2023

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.

Publication Title

J Asset Manag

DOI

https://doi.org/10.1057/s41260-023-00306-3

Link to Full Text

Share

COinS