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