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

When a correction turns into a bear market: What explains the depth of the stock market drawdown?... 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Asset Management Springer Journals

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

Tokic, Damir; Jackson, Dave
Journal of Asset Management , Volume 24 (3) – May 1, 2023
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Publisher
Springer Journals
Copyright
Copyright © The Author(s), under exclusive licence to Springer Nature Limited 2023. Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
ISSN
1470-8272
eISSN
1479-179X
DOI
10.1057/s41260-023-00306-3
Publisher site
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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.

Journal

Journal of Asset Management – Springer Journals

Published: May 1, 2023

Keywords: A correction; Bear market; Credit risk; Recession; Monetary policy

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