• Large equity market drawdowns are related to a set of common factors centered around valuation, technical, and macroeconomic variables.
  • These factors are indicative of the degree of equity market fragility, not only in the U.S. but also across other major developed markets.
  • We show that our framework is effective for both recessionary and nonrecessionary drawdowns; this differentiates our work from previous research focused on predicting economic downturns.
  • Although the U.S. is a key driver of global equity fragility, country-specific factors – particularly valuation – are still relevant.

ABSTRACT

This article develops a formal framework for assessing the likelihood of large equity market drawdowns. The authors estimate a parsimonious logistic regression model for both the United States and a cohort of four additional developed markets and find that market crashes have historically been associated with a set of factors centered around valuation, technical, and macroeconomic indicators. The authors show that their framework is effective for both recessionary and nonrecessionary drawdowns. Finally, they show that, although the United States is a fundamental driver of market fragility globally, country-specific factors are still relevant for predicting the likelihood of large equity market drawdowns.

This abstract has been provided by the Journal of Portfolio Management. © 2023 Pageant Media Ltd. All rights reserved.

The Author

Josh Davis

Global Head of Risk Management

German Ramirez

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CMR2023-0303-2760894