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

Damir Tokic () and Dave Jackson ()
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Damir Tokic: University of Texas Rio Grande Valley
Dave Jackson: University of Texas Rio Grande Valley

Journal of Asset Management, 2023, vol. 24, issue 3, No 3, 184-197

Abstract: 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.

Keywords: A correction; Bear market; Credit risk; Recession; Monetary policy (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1057/s41260-023-00306-3

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